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AMENDMENT NO. 1
TO
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Check the appropriate box:
[X] Filed by the Registrant
[_] Filed by a Party other than the Registrant
[X] Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only
(as permitted by Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CNL AMERICAN PROPERTIES FUND, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, of the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
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CNL AMERICAN PROPERTIES FUND, INC.
400 East South Street
Orlando, Florida 32801 Tel: 407-650-1000 800-522-3863
----------------
Notice of Special Meeting of Stockholders
To Be Held , 1999
----------------
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders of CNL
AMERICAN PROPERTIES FUND, INC., or APF, will be held at 10:30 a.m. local time,
on , 1999 at the CNL Management Center at 450 East South Street, Suite
101, Orlando, Florida, for the following purposes:
(a) to approve three proposals relating to amending and restating APF's
Articles of Incorporation which would, if each proposal is approved,
(i) change APF's name to CNL Restaurant Properties, Inc., (ii) increase
the number of authorized shares of APF's common stock from 62,500,000
to 137,500,000 shares, and (iii) modify certain provisions to reflect
that APF is becoming internally advised, and effect certain other
modifications that APF believes are desirable in connection with
listing APF's common stock for trading on the New York Stock Exchange,
including modifications to conform APF's Articles more closely to the
articles of incorporation of other publicly-traded real estate
investment trusts; and
(b) to transact such other business as may properly come before the meeting
or any adjournment thereof.
Stockholders of record at the close of business on , 1999 will be
entitled to notice of, and to vote at, the meeting or at any adjournment
thereof.
Stockholders are cordially invited to attend the meeting in person. WHETHER
OR NOT YOU NOW PLAN TO ATTEND THE MEETING, YOU ARE ASKED TO COMPLETE, DATE,
SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY FOR WHICH A POSTAGE PAID RETURN
ENVELOPE IS PROVIDED. IT IS IMPORTANT THAT YOUR SHARES BE VOTED. IF YOU DECIDE
TO ATTEND THE MEETING YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.
By Order of the Board of Directors,
_____________________________________
Lynn E. Rose
Secretary
, 1999
Orlando, Florida
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE PROXY STATEMENT
OF CNL AMERICAN PROPERTIES FUND, INC.
Q: What are the proposals I am being asked to vote upon?
A: We, the Board of Directors of CNL American Properties Fund, Inc., or APF,
are requesting that you approve three separate, independent proposals. The
first proposal is to change APF's name to CNL Restaurant Properties, Inc.
The second proposal is to increase the authorized number of shares of APF
common stock, referred to as the APF Shares, from 62,500,000 shares to
137,500,000 shares. The third proposal is to effect the remainder of the
changes to the Articles as set forth in the Restated Articles.
Q: Why do APF's Articles of Incorporation need to be amended?
A: For three reasons. First, to provide better name recognition of APF in the
context of its business. Second, to facilitate consummation of certain
acquisitions that we believe will increase stockholder value. As a result of
these acquisitions, APF will become a full-service restaurant real estate
investment trust, or REIT, and will become one of the largest triple-net
lease REITs in the United States. Following the acquisitions, APF will be
able 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.
Third, upon consummation of these acquisitions, APF intends to list the APF
Shares on the New York Stock Exchange, or NYSE, and become a publicly-
traded REIT. Certain of the amendments we are proposing will modify APF's
existing Articles of Incorporation to provide APF with the greater degree
of operational flexibility that is characteristic of other publicly-traded
REITs.
Q: Am I voting on the acquisitions or listing?
A: No. Stockholder approval is not required for the acquisitions or for
listing.
Q: Does the Board of Directors of APF recommend that I vote in favor of the
proposals?
A: Yes. We unanimously recommend that you vote "For" each of the proposals.
Q: What are the acquisitions that APF is making?
A: APF is making the following three acquisitions:
. APF will become internally advised and will acquire complete acquisition,
development and in-house management functions by acquiring its external
advisor, CNL Fund Advisors, Inc. Because APF has had no employees since
its inception, the Advisor has provided these functions on behalf of APF
and has been responsible for the day-to-day operations of APF, including
raising capital, investment analysis, acquisitions, due diligence, asset
management and accounting services. The acquisition of the Advisor also
will provide APF with restaurant development capabilities including site
selection, construction management and build-to-suit development.
. To increase its financing capabilities and expand its mortgage loan
portfolio, APF will acquire CNL Financial Corp. and CNL Financial
Services, Inc. which we refer to, together, as the CNL Restaurant
Financial Services Group. The CNL Restaurant Financial Services Group
makes and services mortgage loans (and, as described below, "securitizes"
a portion of such loans) to operators of national and regional restaurant
chains comparable to the restaurant chain operators that currently are
tenants of APF.
. To increase the size of its restaurant property portfolio, APF will seek
to acquire 16 CNL Income Funds, which are limited partnerships that
currently own, in the aggregate, 574 restaurant properties similar to the
types of restaurant properties in which
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APF invests. If APF acquires the Advisor, the CNL Restaurant Financial
Services Group and all of the Income Funds, it expects to have total
assets of approximately $1.5 billion at the time those acquisitions are
consummated and it will own or hold a mortgage interest in more than
1,600 restaurant properties.
The Information Memorandum that is attached as an exhibit to this Proxy
Statement explains in detail the terms of the acquisitions and the
background of and reasons for them.
Q: How will the Restated Articles differ from APF's existing Articles of
Incorporation?
A: If approved in their entirety, the Restated Articles:
. will change APF's name to CNL Restaurant Properties, Inc.;
. will increase the number of APF Shares
that APF is authorized to issue from 62,500,000 to 137,500,000 shares;
. will modify certain provisions to reflect that APF is becoming internally
advised as a result of its acquisition of the Advisor; and
. will effect certain other modifications to APF's existing Articles that
APF believes are desirable in connection with listing the APF Shares for
trading on the NYSE, including modifications designed to make APF's
Articles more comparable to the articles of other publicly-traded REITs.
Q: When will the APF Shares be listed for trading on the New York Stock
Exchange?
A: APF will seek to have the APF Shares begin trading on the NYSE concurrently
with the consummation of the acquisition by APF of the Income Funds.
In an effort to obtain a greater following by the investment banking
analyst community, concurrently with or shortly following the Income Fund
acquisitions and NYSE listing, 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.
Q: When do you expect the acquisitions to be completed?
A: We plan to complete the acquisition of the Advisor and the CNL Restaurant
Financial Services Group as soon as practicable. Because APF already has a
sufficient number of authorized APF Shares to consummate these acquisitions,
they may be completed before the Restated Articles are approved. The
acquisitions of the Income Funds, on the other hand, are subject to approval
of the increase in the number of authorized APF Shares by a majority of the
APF stockholders because APF does not currently have a sufficient number of
authorized APF Shares to complete those acquisitions. Further, the
acquisitions of the Income Funds are subject to the approval by the Limited
Partners holding in excess of 50% of the outstanding units of limited
partnership interest of each Income Fund. A special meeting of the Limited
Partners of the Income Funds is scheduled to be held on , 1999 for the
purpose of voting on the Income Fund acquisitions. If the increase in the
number of authorized APF Shares is approved, the acquisitions of the Income
Funds will occur as soon as practicable following the approval by the
Limited Partners of the Income Funds.
It is expected that the acquisitions of the Income Funds will occur in the
fourth quarter of 1999. The General Partners have required that the
acquisitions of the Advisor, the CNL Restaurant Financial Services Group or
the Income Funds be consummated no later than March 31, 2000.
Q: Why is APF acquiring the Advisor?
A: The principal reasons APF is acquiring the Advisor are as follows:
. In part, because investment analysts specializing in REITs have
emphasized in recent years their strong preference for internally-advised
REITs. These analysts believe that the nature
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of the relationship between externally-advised REITs, which APF is
currently, and their external advisors is susceptible to conflicts of
interest, most of which can be avoided through self-administration. For
these reasons, we believe that the marketplace undervalues externally-
advised REITs and that investors and analysts will view an internally-
managed structure more favorably.
. The Advisor currently is entitled to various fees for providing
management, acquisition, development and other services to APF, including
fees that are determined in part based on the cost basis of APF's assets.
Upon the acquisition of the Advisor, the operations of the Advisor will
become part of the business of APF and, accordingly, APF will cease to
pay such fees. While APF will assume the costs associated with the
provision of these services, we believe that due to the substantial
growth in APF's asset base, APF will experience long-term cost savings as
a result of the acquisition.
. The acquisition of the Advisor will enable APF to provide restaurant
development services which include site selection, construction
management and build-to-suit development. The acquisition of those
capabilities will provide APF with an additional pool of restaurant
chains and restaurant chain operators to whom it can offer triple-net
lease and mortgage loan financing.
Q: Why is APF not internally advised now?
A: 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 internal management team. We believe that
APF's asset base has now grown sufficiently large to support such an
infrastructure efficiently.
Q: Why is APF acquiring the CNL Restaurant Financial Services Group?
A: Although APF currently has the ability to make mortgage loans, the
acquisition of the CNL Restaurant Financial Services Group will permit APF
to expand its financing capabilities to include securitization transactions.
APF also will acquire the CNL Restaurant Financial Services Group's existing
mortgage loan portfolio, including the servicing rights for such portfolio,
and will assume the warehouse lines of credit used previously by them in
providing such financial services.
We believe that APF's ability to offer a full range of financial products
to operators of national and regional restaurant chains will increase the
pool of available customers for its products and will enable APF to
position itself to become a preferred provider of restaurant financing
options to restaurant chain operators. As such, we believe the acquisition
of the CNL Restaurant Financial Services Group will allow APF to compete
more effectively with other restaurant REITs.
Q: What are securitization transactions and why would APF engage in them?
A: The CNL Restaurant Financial Services Group "securitizes" mortgage loans. A
mortgage loan securitization involves 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 makes loans and securitizes them by selling them to a special
purpose entity which issues certificates representing beneficial interests
in the pool of mortgage loans. The CNL Restaurant Financial Services Group
receives from a securitization (1) the proceeds, less a placement fee and
other offering expenses, from the sale of the certificates, (2) income in
the form of the "spread" 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 have been
securitized. The CNL Restaurant Financial Services Group usually retains a
subordinated interest in the mortgage loans, which because it is
subordinated, generally will bear interest at a higher rate than
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the mortgage loans. Further, by eliminating the securitized mortgage loans
from its balance sheet, the securitization transactions also reduce the CNL
Restaurant Financial Services Group's equity requirements.
We believe that the expansion of APF's financing capabilities to include
securitization transactions will enable APF to access more financing
opportunities and, ultimately, to increase cash available for distributions
to the APF stockholders. We also believe that securitization transactions
may permit APF 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.
Q: Why is APF acquiring the Income Funds?
A: We believe that the acquisition of the Income Funds ultimately will result
in greater earnings for APF which, in turn, is expected to increase the
market value of the APF Shares and cash distributions to APF's stockholders.
We believe that this will occur for the following reasons:
. 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 based, in part, on the growth potential of
such companies and have historically exceeded the net book values of
their real estate assets. We believe that the increase in the size of
APF's restaurant property portfolio will provide APF greater access to
both debt and equity capital necessary for funding its operations and
consummating acquisitions and financings on economically attractive
terms.
. We also believe that the acquisitions will generate cost savings based on
the economies of scale resulting from APF's larger restaurant property
portfolio.
. Finally, we believe the increase in the size of APF's restaurant property
portfolio will increase the probability of broader coverage of APF by
financial analysts who cover REIT stocks generally. Broader coverage by
financial analysts potentially may enhance the value of the APF Shares
and increase the volume of trading in the APF Shares, which would
increase their liquidity.
Q: Who owns the Income Funds?
A: The Income Funds were formed from 1985 to 1993 by affiliates of CNL Group,
Inc., an affiliate of APF. James M. Seneff, Jr., Chairman of APF's Board of
Directors and Chief Executive Officer, Robert A. Bourne, Vice Chairman of
APF's Board of Directors and Treasurer, and CNL Realty Corporation are the
General Partners of each of the Income Funds.
Q: How will APF's stockholders benefit from the acquisitions?
A: We believe that transforming APF into a full-service REIT will benefit APF's
stockholders in three principal ways.
. First, we believe that APF's ability to provide full-service restaurant
property services will give it a competitive advantage over other REITs
that typically provide a more limited array of services to their
prospective restaurant owners and operators.
. Second, we believe that internal restaurant property service
capabilities, including management, acquisition, development and expanded
financing capabilities, will improve APF's performance through increased
control over functions that are important to the growth of its business.
. Third, for the reasons outlined in the paragraphs above, we believe the
acquisitions will increase the value of the APF Shares following listing
on the NYSE.
Q: How much will these acquisitions cost APF?
A: APF will acquire the Advisor, the CNL Restaurant Financial Services Group
and the Income Funds generally in exchange for APF Shares. APF is paying a
total of 6,150,000 APF Shares for the Advisor and the CNL Restaurant
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Financial Services Group. APF has allocated 3,800,000 of such shares for the
acquisition of the Advisor and 2,350,000 of such shares for the acquisition
of the CNL Restaurant Financial Services Group. If all 16 Income Funds are
acquired, APF will pay, in the aggregate, up to 27,343,243 APF Shares for
them, before the payment by the Income Funds of certain acquisition
expenses.
Q: Why might APF not acquire all 16 of the Income Funds?
A: The acquisition of each Income Fund must be approved by a majority in
interest of the Limited Partners of such Income Fund. Thus, we cannot be
certain that APF will acquire an Income Fund until after the votes have been
counted.
Q: Are the acquisitions of the Advisor and the CNL Restaurant Financial
Services Group subject to approval by their stockholders?
A: No. The stockholders of both the Advisor and the CNL Restaurant Financial
Services Group have already approved the acquisitions of their companies.
Q: How did APF determine that the acquisitions are in my best interests?
A: The Board of Directors of APF first established a Special Committee
consisting of the three independent members of the Board to evaluate
alternatives for increasing stockholder value. To assist them in their
evaluation, the Special Committee engaged the independent investment banking
firms of Merrill Lynch & Co. and Salomon Smith Barney Inc. as its financial
advisors. Based upon consulting with Merrill Lynch and Salomon Smith Barney,
the Special Committee has determined that making the acquisitions, together
with listing the APF Shares on the NYSE, is the strategic alternative that
will most likely maximize stockholder value. In support of its
determination, the Special Committee received two separate fairness opinions
from Merrill Lynch stating that the aggregate consideration to be paid by
APF for the Advisor,and the CNL Restaurant Financial Services Group and for
the Income Funds, is fair to APF from a financial point of view.
Q: What is the dollar value of an APF Share?
A: Because the APF Shares are not listed on the NYSE at this time, the value of
an APF Share is uncertain because there is no established trading market for
the APF Shares. For purposes of the acquisitions, APF has assigned the APF
Shares a value of $20.00 per share, the price at which, after taking into
account the recently approved one-for-two reverse stock split, APF sold APF
Shares in three previous public offerings, the most recent of which was
completed in December 1998.
Q: Will any of APF's affiliates benefit from the acquisitions?
A: As the sole stockholders of the CNL Group Inc., which is the majority
stockholder of the Advisor, Mr. Seneff and his wife will receive as
consideration for their indirect ownership interest in the Advisor 2,452,520
of the APF Shares allocated by the Board for the acquisition of the Advisor.
Mr. Seneff individually will receive an additional 1,259,152 APF Shares as
consideration for the acquisition by APF of his interest in the CNL
Restaurant Financial Services Group. In addition, Mr. Bourne will receive
608,000 and 380,180 APF Shares to be paid by APF as consideration for his
interests in the Advisor and the CNL Restaurant Financial Services Group,
respectively.
As General Partners of the Income Funds, Mr. Seneff and Mr. Bourne have
ownership interests in each Income Fund. They will be entitled to receive
their pro rata portion of the APF Shares paid for each Income Fund in
accordance with the terms of the relevant partnership agreement. Messrs.
Seneff and Bourne will receive an estimated aggregate of 138,000 APF Shares
in exchange for their general partner interests if all of the Income Funds
are acquired. Furthermore, as directors of APF they will be entitled to
receive performance-based incentives, including stock
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options, under APF's 1999 Performance Incentive Plan or any other option,
incentive compensation or similar plan approved by APF's stockholders.
Q: What are the potential risks of the acquisitions?
A: There are a number of potential risks to the stockholders of APF associated
with the acquisitions. We believe that these risks, which are detailed in
the Information Memorandum that accompanies the enclosed Proxy Statement,
are justified by the anticipated benefits to stockholders.
Q: Who can vote on the adoption of the Restated Articles?
A: APF stockholders at the close of business on the record date of ,
1999 are entitled to vote at the Special Meeting.
Approval of each of the proposals related to the adoption of the Restated
Articles requires the affirmative vote of the holders of a majority of the
outstanding APF Shares. A majority vote in favor on a particular proposal
will be binding on you even if you have voted against such proposal.
Q: When and where is the Special Meeting of stockholders?
A: The Special Meeting to vote on the proposals will be held at 10:30 a.m. on
, 1999 at the CNL Management Center at 450 East South Street,
Suite 101, Orlando, Florida.
Q: Must I attend the Special Meeting to vote on the proposals?
A: No. To vote without attending the Special Meeting, simply indicate on the
enclosed proxy card, which is printed on colored paper, how you want to vote
on each proposal, and sign and mail it in the enclosed postage paid return
envelope as soon as possible, so that at the Special Meeting your APF Shares
may be voted "For" or "Against" the proposals. If you prefer, you may also
vote by telephone, following the instructions on the proxy card. If you sign
and send in your proxy card and do not indicate how you want to vote, you
will be counted as having voted "For" each of the proposals. If you do not
send in your card or you abstain from voting, it will count as being unvoted
and will have the same effect as a vote "Against" all of the proposals.
Q: Can I change my vote after I mail my proxy card?
A: Yes, you can change your vote at any time before your proxy is counted 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 proxy; second, you can
send us a new proxy card; or third, you can attend the Special Meeting and
vote in person. Any revocation or new proxy card should be sent to Corporate
Election Services, P.O. Box 125, Pittsburgh, PA, 15230-0125, our vote
tabulator.
Q: Who can help answer my questions?
A: If you have more questions about the acquisitions or would like to request
any additional information, you should contact our solicitation firm which
we hired to assist us in answering your questions and administering the
Special Meeting:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 207-3159
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CNL AMERICAN PROPERTIES FUND, INC.
400 East South Street
Orlando, Florida 32801
Tel: 407-650-1000
800-522-3863
-----------------------
PROXY STATEMENT
-----------------------
This Proxy Statement is furnished by the Board of Directors of CNL American
Properties Fund, Inc., or APF, a Maryland corporation, in connection with the
solicitation by management of proxies to be voted at a Special Meeting of
stockholders to be held on , 1999, and at any adjournment thereof, for the
purposes set forth in the accompanying notice of such meeting. All stockholders
of record at the close of business on , 1999, the record date, will be
entitled to vote at the Special Meeting.
Any proxy, if received in time, properly signed and not revoked, will be
voted at such meeting in accordance with the directions of the stockholder. If
no directions are specified on a proxy that is received the proxy will be voted
FOR each Proposal set forth in this Proxy Statement. Any stockholder giving a
proxy has the power to revoke it at any time before it is exercised. A proxy
may be revoked (1) by delivery of a written statement that the proxy is
revoked, (2) by delivery, at the Special Meeting or otherwise, of a subsequent
proxy executed by the person executing the prior proxy or (3) by attendance at
the Special Meeting and voting in person. Any revocation or new proxy card
should be sent to Corporate Election Services, P.O. Box 125, Pittsburgh, PA,
15230-0125.
Votes cast in person or by proxy at the Special Meeting will be tabulated
and a determination will be made as to whether or not a quorum is present. APF
will treat abstentions as shares that are present and entitled to vote for
purposes of determining the presence or absence of a quorum, but as unvoted for
purposes of determining the approval of any matter submitted to the
stockholders. If a broker submits a proxy indicating that it does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will not be considered as present and entitled to vote with
respect to such matter.
Solicitation of proxies will be primarily by mail. However, directors,
officers and other employees of APF also may solicit proxies, for no additional
compensation, by telephone or telegram or in person. All of the expenses of
preparing, assembling, printing and mailing the materials used in the
solicitation of proxies will be paid by APF. Arrangements may be made with
brokerage houses and other custodians, nominees and fiduciaries to forward
soliciting materials, at the expense of APF, to the beneficial owners of shares
held of record by such persons. In addition, APF has engaged D. F. King & Co.,
Inc., a professional proxy solicitation firm, to aid in the solicitation of
proxies at a fee estimated to be approximately $95,000 plus reimbursement of
reasonable out-of-pocket costs and expenses. APF has agreed to indemnify D.F.
King & Co, Inc. against certain liabilities that it may incur arising out of
the services it provides in connection with the Special Meeting.
As of the record date, 37,348,464 shares of APF's common stock, par value
$.01 per share, which are referred to as the APF Shares, were outstanding. Each
APF Share entitles the holder thereof to one vote on each of the matters to be
voted upon at the Special Meeting. As of the record date, officers and
directors of APF beneficially owned in the aggregate less than 1% of the
outstanding APF Shares.
Unless otherwise indicated, APF Share numbers in this Proxy Statement
reflect a one-for-two reverse stock split approved by the APF stockholders on
May 27, 1999 and effective on June 3, 1999.
It is anticipated that this Proxy Statement and the enclosed proxy first
will be mailed to stockholders on or about , 1999.
<PAGE>
PROPOSALS TO APPROVE AN AMENDMENT AND RESTATEMENT OF
APF'S ARTICLES OF INCORPORATION
On March 11, 1999, the Board of Directors of APF unanimously approved a
proposal to amend and restate APF's existing Articles of Incorporation, which
are referred to as the Existing Articles, and directed that such proposal be
submitted to the APF stockholders for their approval. If approved in their
entirety, the amended and restated Articles of Incorporation, which are
referred to as the Restated Articles:
. will change APF's name to CNL Restaurant Properties, Inc.;
. will increase the number of APF Shares that APF is authorized to issue
from 62,500,000 to 137,500,000 shares;
. will modify certain provisions to reflect that APF is becoming
internally advised as a result of its proposed acquisition of CNL Fund
Advisors, Inc., its external Advisor; and
. will effect certain other modifications to the Existing Articles that
APF believes are desirable in connection with the proposed listing of
the APF Shares for trading on the New York Stock Exchange, or NYSE,
including modifications to conform APF's Existing Articles more closely
to the articles of incorporation of other publicly-traded real estate
investment trusts, or REITs.
The text of the proposed Restated Articles is set forth in Exhibit A to this
Proxy Statement and a marked version of the Existing Articles, which shows the
modifications proposed to be made, is set forth in Exhibit B to this Proxy
Statement.
The adoption of the Restated Articles is split into three separate,
independent proposals. The first proposal is to change APF's name to CNL
Restaurant Properties, Inc. The second proposal is to increase the authorized
number of APF Shares from 62,500,000 shares to 137,500,000 shares. The third
proposal is to make the remainder of the changes to the Existing Articles as
set forth in the Restated Articles. Because each of these proposals will be
separately voted upon, one or more of the proposals may be approved by the
stockholders without having all three proposals approved.
The Board of Directors has determined it to be in the best interests of APF
and its stockholders to adopt the Restated Articles. The Board unanimously
recommends that stockholders vote "For" each of the proposals set forth below.
Approval of each of the proposals requires the affirmative vote of the
holders of a majority of the outstanding APF Shares entitled to vote thereon.
Proxies received will be voted for approval of each proposal unless
stockholders designate otherwise. It is expected that the consummation of APF's
acquisition of the Advisor and the CNL Restaurant Financial Services Group
(discussed below) will occur prior to, or at the latest concurrently with, such
time as the Restated Articles become effective, which will occur upon their
filing with the Maryland Department of Assessments and Taxation. APF will seek
to have the APF Shares begin trading on the NYSE concurrently with the
consummation of the acquisition by APF of the Income Funds (also discussed
below).
The paragraphs below describe the amendments to the Existing Articles that
will be made if each of the proposals are approved by the stockholders and the
reasons that the Board of Directors has proposed such amendments.
Proposal #1: Changing APF's name to CNL Restaurant Properties, Inc.
The Board of Directors has determined that APF should change its name to CNL
Restaurant Properties, Inc. in order to provide better name recognition of APF
in the context of its business. This proposal would amend the Existing Articles
as set forth in Section 1.1 of the Restated Articles to change the name of the
company to CNL Restaurant Properties, Inc. This proposal will not change any
other aspect of the Existing Articles.
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Proposal #2: Increasing the Number of Authorized Shares
General. If this proposal is approved, the number of APF Shares that APF is
authorized to issue will increase from 62,500,000 to 137,500,000 shares. This
proposal would amend the Existing Articles as set forth in Section 5.1 of the
Restated Articles to increase the number of authorized APF Shares to
137,500,000 shares. This proposal will not change any other aspect of the
Existing Articles.
The principal purpose for the increase in authorized APF Shares is to permit
APF to have sufficient shares to consummate contemplated acquisitions that the
Board believes will increase stockholder value. As a result of these
acquisitions, APF will become a full-service REIT which has the ability to
offer to operators of national and regional restaurant chains a complete range
of restaurant development and financing options. The APF stockholders are not
being asked to, and are not required to, approve such acquisitions themselves.
However, the acquisition of the Income Funds, discussed below, is subject to
approval of this proposal by the holders of a majority of the APF Shares
because APF does not currently have a sufficient number of authorized APF
Shares to complete those acquisitions. The acquisitions consist of:
. Acquisition of Advisor. APF will become internally advised and acquire
complete acquisition, development and in-house management functions by
acquiring CNL Fund Advisers, Inc., which is referred to as the Advisor.
Because APF has had no employees since its inception, the Advisor has
provided these functions on behalf of APF and has been responsible for
the day-to-day operations of APF, including raising capital, investment
analysis, acquisitions, due diligence, asset management and accounting
services. The acquisition of the Advisor also will provide APF with
restaurant development capabilities, including site selection,
construction management and build-to-suit development.
. Acquisition of CNL Restaurant Financial Services Group. To increase its
financing capabilities and expand its mortgage loan portfolio, APF will
acquire CNL Financial Corp. and CNL Financial Services, Inc. which are
referred to together as the CNL Restaurant Financial Services Group. The
CNL Restaurant Financial Services Group makes and services mortgage
loans (and, as described below, "securitizes" a portion of such loans)
to operators of national and regional restaurant chains comparable to
the restaurant chain operators that currently are tenants of APF.
. Acquisition of Income Funds. To increase the size of its restaurant
property portfolio, APF will seek to acquire CNL Income Funds I through
XVI, which are limited partnerships that owned, as of March 31, 1999 and
in the aggregate, 574 restaurant properties similar to the types of
restaurant properties in which APF invests. If APF acquires the Adviser,
the CNL Restaurant Financial Services Group and all of the Income Funds,
it expects to have total assets of approximately $1.5 billion at the
time those acquisitions are consummated and it will own or hold a
mortgage interest in more than 1,600 restaurant properties, making it
one of the largest triple-net lease REITs in the United States.
The principal components of these acquisitions are summarized below and the
terms of the acquisitions and the background of and reasons for them are
discussed in detail in the Information Memorandum that is attached as Exhibit C
to this Proxy Statement.
Merger Agreements and Consideration. APF has entered into a merger agreement
with the stockholders of each of the Advisor and the CNL Restaurant Financial
Services Group and merger agreements with the General Partners of each of the
Income Funds. The Advisor and the CNL Restaurant Financial Services Group will
be merged into newly formed, wholly owned subsidiaries of APF, and the Income
Funds will be merged with and into CNL APF Partners, L.P., an existing, wholly
owned subsidiary of APF through which APF will conduct its business after the
acquisition of the Advisor, the CNL Restaurant Financial Services Group and the
Income Funds have been consummated. The merger agreements were negotiated and
executed following the recommendation of a Special Committee of the Board of
Directors, which is comprised of the three independent members of APF's Board,
and the unanimous vote in favor of the acquisitions of the members of the full
Board.
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<PAGE>
The merger agreements provide that the purchase price payable by APF to the
stockholders of the Advisor and the CNL Restaurant Financial Services Group
will consist of 6,150,000 APF Shares (with the Board of Directors having
allocated 3,800,000 of such APF Shares as the consideration paid to the Advisor
and 2,350,000 of such APF Shares as the consideration paid to the CNL
Restaurant Financial Services Group) and that if all of the Income Funds are
acquired, up to an aggregate of 27,343,243 APF Shares (before the payment by
the Income Funds of certain acquisition expenses) will be issued to the Income
Funds. Because the APF Shares are not listed at this time, the value of an APF
Share is uncertain. For purposes of the acquisition of the Advisor, the CNL
Restaurant Financial Services Group and the Income Funds, the APF Shares have
been assigned a value of $20.00 per share, the price at which, after taking
into account the recently approved one-for-two reverse stock split, APF sold
APF Shares in three previous public offerings, the most recent of which was
completed in December 1998. Accordingly, based on that value, APF will pay $123
million for the Advisor and the CNL Restaurant Financial Services Group and, if
all the Income Funds are acquired, up to an aggregate of approximately $547
million for them (before payment by the Income Funds of certain acquisition
expenses).
The acquisition of each Income Fund is subject to the approval by the
holders of a majority of units of limited partnership interest of each Income
Fund. A special meeting of the Limited Partners of the Income Funds is
scheduled to be held on , 1999 for the purpose of voting on the
acquisitions. The stockholders of both the Advisor and the CNL Restaurant
Financial Services Group have already approved the acquisitions of their
companies.
APF plans to complete the acquisition of the Advisor and the CNL Restaurant
Financial Services Group as soon as practicable. Of the 62,500,000 APF Shares
authorized for issuance under the Existing Articles, 37,348,463 APF Shares have
been issued and are outstanding. Because APF already has a sufficient number of
authorized APF Shares available to consummate these acquisitions, they may be
completed before the Restated Articles are approved. The acquisitions of the
Income Funds, on the other hand, are subject to approval of the Restated
Articles by the APF stockholders because APF does not currently have a
sufficient number of authorized APF Shares to complete those acquisitions.
Consequently, the merger agreements relating to the Income Funds are
conditioned on approval by the APF stockholders of this proposal. Assuming
approval of this proposal by APF stockholders, the acquisition of the Income
Funds will occur as soon as practicable following the approval by the Limited
Partners of the Income Funds. It is expected that the acquisitions of the
Income Funds will be consummated in the fourth quarter of 1999. The General
Partners have required that the acquisitions be consummated no later than March
31, 2000.
APF does not currently know the exact number of APF Shares that will be
required for the acquisitions, because the total number of APF Shares that will
be issued in connection with the acquisitions of the Income Funds will depend
on the number of Income Funds and the particular Income Funds that are
acquired, which will not be determined until the Limited Partners of the Income
Funds have voted on the acquisitions. In addition, the Limited Partners of the
Income Funds that are acquired will have the option to elect to receive, in
exchange for their limited partnership interests, alternative consideration
consisting of 7.0% callable notes due 2004, rather than APF Shares. The
number of APF Shares issued to a particular Income Fund will be reduced to the
extent its Limited Partners elect to receive the notes. In addition, if Limited
Partners in a particular Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares to be paid to such Income
Fund, then APF has the right to decline to acquire that Income Fund.
Assuming that the acquisitions will require approximately 33,500,000 APF
Shares (before the payment by the Income Funds of certain acquisition
expenses), APF will have up to approximately 67,000,000 remaining authorized
but unissued APF Shares following the consummation of the acquisitions. These
remaining authorized APF Shares would provide APF with flexibility to raise
additional equity capital from time to time, as consideration for future
acquisitions or for a variety of other corporate purposes. Shortly following
the above-described acquisitions and in connection with listing the APF Shares
for trading on the NYSE, APF intends to offer APF Shares to the public pursuant
to an underwritten public offering, if market conditions are suitable. APF has
not yet determined how many APF Shares will be offered for sale in the public
offering or
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<PAGE>
exactly when the offering will commence. Other than the issuance of APF Shares
pursuant to the proposed acquisitions, the issuance of APF Shares to the
directors, officers and employees of APF pursuant to the terms of APF's 1999
Performance Incentive Plan and the proposed public offering of APF Shares, APF
does not have any current plan to issue any of the additional APF Shares to be
authorized.
Summary of the Acquisitions. The determination to proceed with the
acquisition of the Advisor, the CNL Restaurant Financial Services Group and the
Income Funds and to list the APF Shares on the NYSE was made following many
months of deliberation and based on the advice of Merrill Lynch and Salomon
Smith Barney, independent investment banking firms engaged by the Special
Committee as its financial advisors. Based upon the advice of Merrill Lynch and
Salomon Smith Barney, the Special Committee determined that making such
acquisitions and listing the APF Shares on the NYSE are the strategic
alternatives that will most likely maximize stockholder value. In support of
its determination, APF has obtained two separate fairness opinions from Merrill
Lynch which state that the number of APF Shares payable by APF for the Advisor
and the CNL Restaurant Financial Services Group and for the Income Funds is
fair to APF from a financial point of view. The chronology of the deliberations
of the Board and the Special Committee, the factors that they considered in
determining to recommend these acquisitions and listing the APF Shares on the
NYSE, the various alternatives to such acquisitions and listing that were
considered and the fairness opinions rendered by Merrill Lynch are described in
the Information Memorandum under the caption "BACKGROUND OF AND REASONS FOR THE
ACQUISITIONS." Copies of the fairness opinions rendered by Merrill Lynch are
attached as Exhibit D-1 and Exhibit D-2, respectively, to this Proxy Statement.
The Board believes that transforming APF into a full-service REIT by
acquiring the Advisor and the CNL Restaurant Financial Services Group and
significantly increasing APF's size by acquiring the Income Funds will enhance
APF stockholder value. APF believes that such acquisitions will achieve three
important strategic objectives for APF. First, APF's ability to provide
integrated restaurant property services will give it a competitive advantage
over other REITs that typically provide a more limited array of services to
their prospective restaurant owners and operators. Second, the acquisition of
internal restaurant property service capabilities, including management,
acquisition, development and expanded financing capabilities, will improve
APF's performance through increased control over functions that are important
to the growth of its business. Third, such acquisitions will facilitate listing
of the APF Shares on the NYSE and increase the value of the APF Shares
following such listing.
Acquisition of the Advisor. APF will become internally advised and acquire
complete acquisition, development and asset management functions by acquiring
the Advisor. Because APF has had no employees since its inception, the Advisor
has provided these functions on behalf of APF and has been responsible for the
day-to-day operations of APF, including raising capital, investment analysis,
acquisitions, due diligence, asset management and accounting services. The
acquisition of the Advisor also will enable APF to provide restaurant
development services which include site selection, construction management and
build-to-suit development. As of March 31, 1999, the Advisor was overseeing
approximately 75 restaurant development projects.
The Advisor currently is entitled to various fees for providing services to
APF, including fees that are determined in part based on the cost basis of
APF's assets. Upon the acquisition of the Advisor, the operations of the
Advisor will become part of the business of APF and, accordingly, APF will
cease to pay such fees. APF has not previously sought to become internally
advised because, historically, it has not had a large enough asset base to
provide the economies of scale needed to support efficiently the extensive
general and administrative expenses of an internal management team. APF
believes that its asset base has now grown sufficiently large to support such
an infrastructure efficiently and that, due to such growth, APF will experience
long-term cost savings as a result of the acquisition of the Advisor.
In determining to acquire the Advisor, the Special Committee and the Board
considered, among other things, that investment analysts specializing in REITs
in recent years have emphasized their strong preference for internally-advised
REITs. These analysts believe 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
5
<PAGE>
through becoming internally advised. An externally-advised REIT may compensate
its external advisor on a basis, such as a percentage of total assets or
revenues under management, that may not best align the interest of the external
advisor with the REIT's stockholders. While the Advisor owes a fiduciary
obligation to the APF stockholders and governance mechanisms have been
implemented to resolve potential conflicts of interest and protect APF's
stockholders, APF believes that the marketplace would value APF more favorably
as an internally-advised REIT. Of the REITs that are traded on the NYSE and
have equity market capitalizations of more than $1 billion, approximately 89%
are self-advised. Accordingly, APF believes that investors and analysts will
view an internal management structure more favorably.
Acquisition of CNL Restaurant Financial Services Group. Although APF
currently has the ability to make mortgage loans, the acquisition of the CNL
Restaurant Financial Services Group will permit APF to expand its financing
capabilities to include securitization transactions. APF also will acquire the
CNL Restaurant Financial Services Group's existing mortgage loan portfolio,
including the servicing rights for such portfolio, and will assume the
warehouse lines of credit used previously by them in providing such financial
services. As of March 31, 1999, the CNL Restaurant Financial Services Group had
originated approximately $553 million in mortgage loans on 545 restaurant
properties in 40 states, and had securitized approximately $269 million of the
$553 million of originated mortgage loans. Also as of that date, the CNL
Restaurant Financial Services Group had signed commitments for an additional
$123 million in mortgage loans.
The CNL Restaurant Financial Services Group "securitizes" mortgage loans. A
mortgage loan securitization involves 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 makes loans and securitizes them by selling them to a special purpose
entity which issues certificates representing beneficial interests in the pool
of mortgage loans. The CNL Restaurant Financial Services Group receives from a
securitization (1) the proceeds, less a placement fee and other offering
expenses, from the sale of the certificates, (2) income in the form of the
"spread" 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 have been securitized. The CNL Restaurant Financial
Services Group usually will retain a subordinated interest in the mortgage
loans, which because it is subordinated, generally will bear interest at a
higher rate than the mortgage loans as a whole. Further, by eliminating the
securitized mortgage loans from its balance sheet, the securitization
transactions also reduce the CNL Restaurant Financial Services Group's equity
requirements.
APF believes that the expansion of its financing capabilities to include the
CNL Restaurant Financial Services Group's securitization capabilities will
enable APF to access more financing opportunities and, ultimately, to increase
cash available for distributions to the APF stockholders. APF believes that
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 equity or debt securities.
Acquisition of Income Funds. As of March 31, 1999, APF had invested more
than $670 million in 513 restaurant properties in 41 states. APF is seeking to
increase its asset base by acquiring the Income Funds, which currently own, in
the aggregate, 574 restaurant properties. For the quarter ended March 31, 1999,
the Income Funds had aggregate gross revenues of approximately $11.0 million.
If APF acquires the Advisor, the CNL Restaurant Financial Services Group and
all of the Income Funds, it expects to have assets of approximately $1.5
billion and to own or hold a mortgage interest in more than 1,600 restaurant
properties, making it one of the largest triple-net lease REITs in the United
States.
The Income Funds were formed from 1985 to 1993 by affiliates of CNL Group,
Inc., an affiliate of APF. The Limited Partners of the Income Funds are the
individuals and entities who invested in the funds. James M. Seneff, Jr., APF's
Chairman and Chief Executive Officer, Robert A. Bourne, APF's Vice Chairman and
Treasurer, and CNL Realty Corporation are the general partners of each of the
Income Funds.
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The table below lists (1) the Income Funds that APF is seeking to acquire,
(2) the number of APF Shares being offered to each Income Fund if it is
acquired and (3) the estimated value, based on the assigned value of $20.00 per
APF Share, of the APF Shares to be paid to each Income Fund. The estimated
value of the APF Shares being offered to each Income Fund reflects a reduction
in the number of APF Shares paid to that Income Fund by APF for that Income
Fund's allocable portion of the expenses of the acquisitions.
<TABLE>
<CAPTION>
Estimated
Value of APF
Number of APF Shares before
Shares Offered Acquisition
Fund to Fund(1) Expenses(1)
---- -------------- -------------
<S> <C> <C>
CNL Income Fund, Ltd............................ 578,880 $11,577,600
CNL Income Fund II, Ltd......................... 1,196,634 23,932,680
CNL Income Fund III, Ltd........................ 1,041,451 20,829,020
CNL Income Fund IV, Ltd......................... 1,334,008 26,680,160
CNL Income Fund V, Ltd.......................... 1,024,516 20,490,320
CNL Income Fund VI, Ltd......................... 1,865,194 37,303,880
CNL Income Fund VII, Ltd........................ 1,601,186 32,023,720
CNL Income Fund VIII, Ltd....................... 2,021,318 40,426,360
CNL Income Fund IX, Ltd......................... 1,850,049 37,000,980
CNL Income Fund X, Ltd.......................... 2,121,622 42,432,440
CNL Income Fund XI, Ltd......................... 2,197,098 43,941,960
CNL Income Fund XII, Ltd........................ 2,384,248 47,684,960
CNL Income Fund XIII, Ltd....................... 1,943,093 38,861,860
CNL Income Fund XIV, Ltd........................ 2,156,521 43,130,420
CNL Income Fund XV, Ltd......................... 1,866,951 37,339,020
CNL Income Fund XVI, Ltd........................ 2,160,474 43,209,480
</TABLE>
- --------
(1) Assumes that none of the Limited Partners of the Income Funds elects to
receive the notes.
APF believes that increasing its asset base through the Income Fund
acquisitions ultimately will result in greater earnings for APF, which, in
turn, is expected to increase the market value of the APF Shares and cash
distributions to the APF stockholders. APF believes that this will occur for
the following reasons:
. APF believes 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 based, in part, on the growth
potential of such companies and have historically exceeded the net book
values of their real estate assets. APF believes that the increase in
the size of its restaurant property portfolio will provide APF greater
access to both debt and equity capital necessary for funding its
operations and consummating acquisitions and financings on economically
attractive terms.
. APF also believes that the Income Fund acquisitions will generate cost
savings based on the economies of scale resulting from a larger
restaurant property portfolio.
. Finally, APF believes the increase in the size of its restaurant
property portfolio will increase the probability of broader coverage of
APF by financial analysts who cover REIT stocks generally. Broader
coverage by financial analysts may enhance the value of the APF Shares
and increase the volume of trading in the APF Shares, which would
increase their liquidity.
Listing on the NYSE; Public Offering. APF will provide liquidity and a
trading market for the APF Shares by listing such shares on the NYSE. APF will
seek to have the APF Shares begin trading on the NYSE concurrently with the
consummation of the acquisition by APF of the Income Funds, but APF will seek
to list the APF Shares regardless of whether the Income Fund acquisitions are
consummated. In an effort to obtain a greater following by the investment
banking analyst community, concurrently with or shortly following the Income
Fund acquisitions and listing, and assuming market conditions permit, APF
intends to offer APF Shares
7
<PAGE>
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.
Effect of Increase in Authorized Shares. The Restated Articles would effect
an increase in the number of authorized APF Shares by 75,000,000 APF Shares. To
the extent APF issues these additional APF Shares, which it will do to
consummate the Income Fund acquisitions and to effect the proposed underwritten
public offering, the voting power of APF's current stockholders will be
diluted. In addition, the issuance of additional APF Shares in connection with
the acquisition of the Advisor and the CNL Restaurant Financial Services Group
may result in a reduction in net earnings per APF Share if the earnings
attributable to the businesses and restaurant properties that APF will acquire
in such acquisitions are not sufficient to maintain the level of net earnings
per APF Share existing prior to such issuance or issuances. Internal management
projections reviewed and considered by the Special Committee indicate that such
acquisitions will be accretive on a net earnings per share basis. For a
discussion of the accretion analysis that was performed by APF, see "BACKGROUND
OF AND REASONS FOR THE ACQUISITIONS -- Recommendation on the CNL Restaurant
Business Acquisitions" in the Information Memorandum attached as Exhibit C to
this Proxy Statement.
Authorization of additional APF Shares also could, under certain
circumstances, have an anti-takeover effect, although this is not the intention
of the amendments. An increased number of authorized APF Shares could
discourage, or be used to impede, an attempt to acquire or otherwise change
control of APF. The private placement of APF Shares into company "friendly"
hands, for example, could dilute the voting strength of a party seeking control
of APF. Furthermore, many companies have issued warrants or other rights to
acquire additional shares of common stock to the holders of their common stock
to discourage or defeat unsolicited share accumulation programs and acquisition
proposals, which programs or proposals may be viewed by the boards of directors
as not in the best interests of such companies and their stockholders. Although
APF has no present intent to use the additional authorized APF Shares for such
purposes, an increased number of APF Shares would be available for such
purposes if the Restated Articles are adopted.
Proposal #3: Effecting the Other Changes to the Existing Articles
This proposal, if approved, would effect the remaining changes to Existing
Articles as set forth in the Restated Articles. As discussed further below,
these changes are designed (1) to reflect that APF is becoming internally
advised as a result of its acquisition of the Advisor, and (2) in anticipation
of listing, to make APF's Existing Articles more comparable to the articles of
publicly-traded REITs.
Modifications to Reflect APF Becoming Internally Advised
The Existing Articles contain a number of provisions that impose guidelines
on transactions between APF and the Advisor and its affiliates. As discussed
above, in order to become a full-service REIT, APF will acquire the Advisor. As
a result of that acquisition, the separate existence of the Advisor will cease,
its operations will become part of the business of APF and APF will become an
internally-advised REIT. Once that occurs, the provisions in the Existing
Articles relating to the Advisor and its affiliates and to transactions and
relations between APF and the Advisor and its affiliates will no longer be
applicable. These provisions, which are eliminated in the Restated Articles,
are discussed below.
Independent Director Requirements. Section 2.1 of the Existing Articles
provides that a majority of the members of the Board of Directors must be
"Independent Directors." An "Independent Director" is defined in the Existing
Articles as someone who is not, and has not been for the previous two years,
associated with the Advisor. Because APF is acquiring the Advisor and becoming
internally advised, the Restated Articles eliminate the requirement that APF
have directors not associated with the Advisor. The Restated Articles also
eliminate any provisions of the Existing Articles that are only relevant if APF
has "Independent Directors." This includes, among others, Section 2.2 of the
Existing Articles (requiring that a majority of the members of Board committees
be Independent Directors), Section 2.6 (requiring that the Independent
Directors approve certain enumerated matters) and Section 5.2 (requiring the
Independent Directors to conduct an annual review of APF's investment
policies).
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The term "independent director" is more commonly used to refer to a director
who is not also an employee of the company of which he or she is a director and
who is otherwise free of any relationship that would interfere with his or her
ability to exercise independent judgment in respect of that company's business.
In this regard, APF currently has five directors, two of whom, James M. Seneff,
Jr., APF's Chairman of the Board of Directors and Chief Executive Officer, and
Robert A. Bourne, APF's Vice Chairman of the Board of Directors and Treasurer,
are officers of APF and three of whom are independent directors under the more
common meaning of the term. It is expected that for the foreseeable future a
majority of the Board will continue to be comprised of independent directors.
Provisions Relating to Advisor Services. Article IV of the Existing Articles
consists of provisions that govern the relationship between APF and the
Advisor. These provisions include guidelines for supervision of the Advisor by
the Board of Directors, provisions relating to the termination of the Advisor,
restrictions on the types and amount of fees payable by APF to the Advisor for
services provided and limitations on reimbursement of expenses incurred by the
Advisor in performing those services. Because APF will acquire the Advisor and
become internally advised, Article IV of the Existing Articles will no longer
be applicable to APF's operations and will therefore be eliminated in the
Restated Articles.
Certain Conflict of Interest Provisions. In order to mitigate certain
potential conflicts of interest with the Advisor, Sections 6.3 and 6.4 of
Article VI of the Existing Articles contain a number of restrictions with
respect to transactions between APF and the Advisor and their respective
affiliates and on certain activities of the Advisor and its affiliates. For the
reasons discussed below, these provisions also are eliminated in the Restated
Articles.
Section 6.3(i) of the Existing Articles provides that the Advisor and its
affiliates will not offer or sell interests in certain subsequently formed
public programs prior to the completion of APF's initial public offering and
restricts investing by such programs prior to the time a certain percentage of
the proceeds of APF's initial public offering were invested. As described
above, once APF acquires the Advisor, restrictions on the activities of the
Advisor and its affiliates will no longer be applicable. The particular
provisions of Section 6.3(i) also are no longer relevant as APF's initial
public offering was completed in early 1997 and the proceeds of the initial
public offering were fully invested thereafter.
Sections 6.3(ii) and 6.4 also are eliminated in the Restated Articles
because they similarly will be inapplicable when APF acquires the Advisor. The
provisions that are being so eliminated include: (i) guidelines on how to
resolve conflicts when an investment opportunity becomes available which is
suitable for both APF and a public or private entity with which the Advisor or
its affiliates are affiliated (Section 6.3(ii)), (ii) restrictions on the
provision of goods and services to APF by the Advisor or its affiliates
(Section 6.4(i)) and (iii) restrictions on loans by the Advisor and its
affiliates to APF (Section 6.4(ii)). Section 6.4(ii) also restricts APF from
making any loans to affiliates. That provision is eliminated in the Restated
Articles for the reasons described below under "Other Modifications --
Restrictions on Affiliated Transactions."
Other Modifications
The Existing Articles were adopted prior to APF's commencing operations and
when APF had not yet acquired restaurant properties. In that context, a number
of limitations and restrictions were included in APF's Existing Articles. The
principal purpose of these limitations and restrictions was to impose
parameters on, and provide guidelines for, the development of APF's operating
capabilities and the acquisition of its restaurant property portfolio. Certain
of these limitations and restrictions were required under state regulations
because at the time of the initial public offering of APF Shares, the APF
Shares were not listed for trading on a national securities exchange or
designated for quotation on Nasdaq. Publicly-traded REITs are not required to,
and do not, include these types of provisions in their governing documents.
Since the adoption in 1995 of APF's Articles of Incorporation (which have
not been comprehensively amended), APF has become a fully-operating restaurant
REIT, with a portfolio at March 31, 1999 of 513
9
<PAGE>
restaurant properties. APF has a four-year operating history, which means that
investors and potential investors now have substantial information on which to
evaluate APF and its business. In view of APF's operating history and its plans
for listing the APF Shares on the NYSE, APF and the Board of Directors believe
that many of the limitations and restrictions that were included in the
Existing Articles are unduly restrictive and could prevent APF from pursuing
favorable investment opportunities which could enhance stockholder value. In
addition, because other publicly-traded REITs generally are not bound by
similar limitations and restrictions, they could impair APF's ability to
compete effectively for investments and management talent. The Board believes
such limitations and restrictions should be modified so that APF will be
governed by articles of incorporation that are comparable to the articles of
incorporation of other publicly-traded operating REITs. The proposed Restated
Articles reflect the modifications that APF and the Board believe should be
made to the Existing Articles.
The paragraphs below discuss, with respect to each provision of the Existing
Articles proposed to be modified by the Restated Articles, other than
modifications discussed above, the current provision as it appears in the
Existing Articles, the modified provision as it will appear in the Restated
Articles and the reason or reasons why the Board believes the provision should
be so modified.
References to NASAA REIT Guidelines. Several provisions of the Existing
Articles reference the guidelines for Real Estate Investment Trusts published
by the North American Securities Administrators Association. These guidelines,
which are referred to herein as the NASAA REIT guidelines, which consist of
substantive restrictions on the operations of a REIT, are applicable when a
REIT is making a public offering of its securities unless those securities are
listed for trading on a national securities exchange or designated for
quotation on Nasdaq. Because the governing documents of publicly-traded REITs
are not required to comply with the NASAA REIT guidelines and because APF will
be becoming a publicly-traded REIT, these references have been eliminated in
the Restated Articles.
The Existing Articles also contain provisions that, while they do not
specifically reference the NASAA REIT guidelines, were included to comply with
those guidelines. Many of those provisions are modified or eliminated by the
Restated Articles as described elsewhere in this Proxy Statement.
Experience of Directors. The Existing Articles contain provisions requiring
that a director must have had, prior to his or her election to APF's Board of
Directors, "at least three (3) years of relevant experience demonstrating the
knowledge and experience required to successfully acquire and manage the type
of assets being acquired by [APF]." The Existing Articles further provide that
one of the Independent Directors must have three years of relevant real estate
experience. For a discussion of elimination of the Independent Director
requirement, see "Modifications to Reflect APF Becoming Internally Advised --
Independent Director Requirements" above.
The director experience requirements were included in the Existing Articles
in order to ensure that the directors guiding APF through its initial
development and acquisition phases were sufficiently experienced in the type of
activities in which APF intended to engage. While relevant experience and
particularly relevant real estate experience are factors that APF would
consider in recruiting and proposing nominees for director positions, APF
believes that because it is now a fully operating company with a large
portfolio of restaurant properties, it is no longer necessary or desirable to
require that directors have a particular type or specific number of years of
experience. Indeed, APF believes that having a director experience requirement
may prevent APF from proposing nominees who could potentially enrich the
composition of the Board of Directors by bringing to it broad and useful
experience, although they might not necessarily be experienced in the
acquisition and development of real properties. Examples of individuals who
might be precluded from serving as directors due to the director experience
requirements include government officials and representatives and senior
executives and directors of public companies that are not engaged in real
estate or restaurant-related activities. Individuals with such backgrounds
often are desired by public companies to serve on their boards of directors.
APF believes that its Board should be composed of persons who can best serve
the interests of its stockholders. Because some of those persons might not meet
the director experience requirements under the Existing Articles, those
requirements have been eliminated under the Restated Articles.
10
<PAGE>
Investment Limitations. The Existing Articles contain a number of
limitations and restrictions on APF's ability to make certain types of
investments. These investment limitations and restrictions were established, as
described above, in order to impose parameters on APF's operations because at
the time it had not commenced operations or acquired any restaurant properties.
The Board believes that now that APF is a fully-operating company, these
limitations and restrictions are no longer necessary or desirable because they
could impede APF's ability to take advantage of favorable investment
opportunities. Moreover, the elimination of certain of these limitations and
restrictions (for example, limitations under the Existing Articles on APF's
mortgage lending activities) will be desirable in light of APF's expansion of
its financing capabilities in connection with its acquisition of the CNL
Restaurant Financial Services Group. The Board of Directors further believes
that these limitations and restrictions are inconsistent with APF's ability to
conduct business as a publicly-traded REIT and that, like other publicly-traded
REITs, the decision to make or not make these types of investments should be
wholly within the authority of the Board and APF's management.
For the foregoing reasons, the Board of Directors is proposing the
elimination of the investment limitations and restrictions summarized below.
The full text of the eliminated provisions is set forth in the marked version
of the Existing Articles in Exhibit B to this Proxy Statement.
. Section 5.4 Investment Limitations. The investment limitations in
Section 5.4 of the Existing Articles that are eliminated in the Restated
Articles for the reasons outlined above prohibit APF from: (1) investing
more than 10% of its total assets in unimproved real property or
indebtedness secured by a deed of trust or mortgage loan on unimproved
real property (Section 5.4(i)); (2) investing in commodities or
commodity future contracts (Section 5.4(ii)); (3) investing in or making
mortgage loans unless an appraisal is obtained concerning the property
and certain other conditions are met (Sections 5.4(iii), (iv) and (v));
(4) investing in equity securities, except under certain limited
circumstances (Section 5.4(vi)); (5) except under specified
circumstances, issuing (A) equity securities redeemable solely at the
option of the holder, (B) debt securities, (C) common or preferred
shares on a deferred payment basis or under similar arrangements, (D)
non-voting or assessable securities and (E) options, warrants, or
similar evidences of right to buy its securities (Section 5.4(vii)); (6)
investing in contracts for the sale of real estate unless they are in
recordable form and appropriately recorded in the chain of title
(Section 5.4(viii)); (7) acquiring a restaurant property unless the
consideration to be paid for each such property is authorized by the
Board (Section 5.4(ix)); (8) engaging in underwriting or the agency
distribution of securities issued by others or in trading (Section
5.4(x)); (9) investing in any foreign currency or bullion or engaging in
any short sales (Section 5.4(xi)); and (10) issuing senior securities
except notes to lenders and preferred shares (Section 5.4(xii)).
. Limitations on Secured Equipment Financing. The Restated Articles also
eliminate the requirement under Section 5.3(iv) of the Existing Articles
that the offering by APF of leases secured by restaurant equipment must
be approved by a majority of directors, including a majority of
Independent Directors, as being fair, competitive and commercially
reasonable.
. Limitations on Investment in Equity Securities. The restriction in
Section 5.3(iii) of the Existing Articles on investment by APF in equity
securities also is eliminated under the Restated Articles. Under Section
5.3(iii), APF may invest in equity securities so long as a majority of
the disinterested directors (including a majority of the Independent
Directors) approve the investment as being fair, competitive and
commercially reasonable.
Limitations on Borrowing and Indebtedness. Historically, APF has funded
acquisitions using net proceeds from offerings of APF Shares. Since the
investment of proceeds from its last offering of APF Shares in December 1998,
APF has, and intends in the future 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. Under Section 3.2(iv) and Section 5.4(xiii)
of the Existing Articles, total indebtedness of APF generally cannot exceed
300% of the net asset value of APF's assets. Although it is unlikely that APF
would ever exceed that level of indebtedness, an
11
<PAGE>
absolute limit on APF's borrowings could impair its ability to engage in
potentially advantageous transactions. Such a limitation also is uncommon among
publicly-traded REITs and thus could restrict APF's ability to compete for
investments and investment opportunities. The proposed Restated Articles
therefore do not contain any limitation on the amount or percentage of
indebtedness that APF may incur in the future.
APF's Board of Directors has agreed that, as a general policy, APF will
borrow funds only when APF's ratio of debt-to-total assets is 45% or less.
Because the Restated Articles would eliminate any limitations on APF's ability
to borrow, however, APF's Board could modify that policy at any time after the
Restated Articles are adopted. If that policy were changed, APF could become
more highly leveraged, resulting in an increase in the amount 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. Because this is only a policy, the
Board could, depending on the market conditions, modify the policy and increase
APF's leverage above 45%.
Restrictions on Affiliated Transactions. Various provisions of the Existing
Articles limit APF's ability to engage in transactions with the Advisor, a
director of APF or any of their affiliates. In general, these provisions
require that such transactions, which are referred to herein as affiliated
transactions, be approved by a majority of the disinterested directors. They
also contain limitations on the substantive aspects of the affiliated
transactions themselves, such as restrictions on the consideration to be paid
by APF for services provided or assets acquired from or sold to such persons.
The provisions in the Existing Articles restricting affiliated transactions
are eliminated in the Restated Articles for a number of reasons. First, because
the Advisor is being acquired by APF, the likelihood of APF engaging in any
affiliated transactions is greatly reduced. Second, as discussed above, the
Restated Articles are intended to be more consistent with the articles of
incorporation of publicly-traded REITs and other public companies. The articles
of such companies generally do not contain charter restrictions on affiliated
transactions of the type proposed to be eliminated because, among other
reasons, the corporate laws of most states already contain provisions
restricting affiliated transactions. Under Maryland corporate law, to which APF
is subject, transactions between APF and its directors, or persons in which
such directors have a material financial interest, may be void or voidable
unless the conflict giving rise to the transaction is disclosed and the
transaction is approved or ratified by a majority of disinterested directors or
a majority of the stockholders or the transaction is fair and reasonable to
APF. Thus, APF's ability to enter into affiliated transactions is restricted
under applicable state law even if the affiliated transactions provisions in
the Existing Articles are eliminated by the Restated Articles.
The affiliated transaction provisions that are proposed to be eliminated in
the Restated Articles are the following:
. Joint Ventures. The Restated Articles eliminate Section 5.3(ii) of the
Existing Articles which provides that APF may invest in joint ventures
with the Advisor, one or more directors and any affiliates only if a
majority of disinterested directors approve the investment as being
fair and reasonable to APF and on substantially the same terms and
conditions as those received by other joint venturers.
. Sales and Leases to and from APF. The Restated Articles also eliminate
Sections 6.1 and 6.2 of the Existing Articles which require that APF's
disinterested directors approve as fair and reasonable to APF,
respectively, the purchase of property by APF from the Advisor, a
director or any affiliate and the acquisition or lease of assets from
APF by the Advisor, a director or any affiliate. Section 6.1 also
provides that the purchase by APF of any property from the Advisor, a
director or any affiliate must be at a price no greater than the cost
of the asset to the Advisor, or, as the case may be, such director or
affiliate, or if the price to APF is in excess of such cost, that
substantial justification for such excess exists, such excess is
reasonable and that the cost does not exceed the asset's appraised
value.
12
<PAGE>
. Loans to Affiliates. The first sentence of Section 6.4(ii) prohibiting
APF from making loans to affiliates similarly is eliminated in the
Restated Articles.
. General Restriction. Section 9.5 of the Existing Articles contains
certain general restrictions on all transactions between APF and its
affiliates. The Restated Articles eliminate these restrictions which,
in addition to disinterested director approval, require that an
affiliated transaction be fair and reasonable to APF and its
stockholders, that the terms of such transaction are at least as
favorable as the terms of comparable arms-length transactions and that
if an acquisition is involved, the total consideration is not in excess
of the appraised value of the property being acquired. The Restated
Articles also eliminate the limitations in Section 9.5 on the payment
by APF of compensation to affiliates.
Voting Restrictions. The Restated Articles also eliminate Section 8.3 of the
Existing Articles which prohibits the Advisor, the directors and any of their
affiliates from voting on matters submitted to the APF stockholders regarding
removal of the Advisor, directors or any of their affiliates or any transaction
between APF and them. This provision, which was included in the Existing
Articles in accordance with the NASAA REIT guidelines, discussed above, is
eliminated because the articles of incorporation of publicly-traded REITs and
other public companies normally do not contain voting restrictions of this type
and, with respect to the restrictions on the Advisor and voting on removal of
or transactions with the Advisor, because APF is acquiring the Advisor.
Reports to Stockholders. Section 8.7 of the Existing Articles lists the
items of information that must be included in APF's annual report to
stockholders. However, because APF is a reporting company under the rules and
regulations of the Securities and Exchange Commission, or the SEC, and it will
become subject to the rules and regulations of the NYSE following listing,
APF's annual reports will be required to comply with both the SEC and NYSE
annual reporting requirements. For these reasons, Section 8.7 has been modified
by eliminating the enumerated informational requirements and providing that the
reports to stockholders be prepared and delivered to stockholders in accordance
with the requirements of the SEC and the NYSE.
Indemnification. Under Section 7.2(i) of the Existing Articles, APF is
required to indemnify its directors and officers and permitted to indemnify its
employees and agents for losses or liabilities any of them, each referred to
herein as an indemnitee, may incur in connection with APF's business.
Indemnification is not available, however, (1) for losses or liabilities
resulting from conduct by the indemnitee that constitutes negligence,
misconduct, bad faith or active or deliberate dishonesty, (2) if the indemnitee
received an improper personal benefit, (3) in the case of a criminal
proceeding, the indemnitee had reasonable cause to believe his or her acts were
unlawful or (4) in a proceeding by or in the right of APF, the indemnitee is
adjudged liable to APF. Under Section 7.2(ii) of the Existing Articles, APF
also may not provide indemnification for losses or liabilities arising from
alleged violations by an indemnitee of federal or state securities laws, except
under certain specified circumstances.
The indemnification provisions under the Existing Articles are more narrow
than the indemnification provisions of publicly-traded REITs and other public
companies. They also limit APF's ability to provide indemnification to the
extent permitted by Maryland corporate law. The Restated Articles modify the
indemnification provisions, consistent with the charter provisions of publicly-
traded REITs and other public companies and consistent with Maryland law, to
provide that APF will indemnify its directors and officers and may indemnify
its employees and agents to the fullest extent permitted by Maryland law. This
modification will allow APF to offer director and officer candidates
indemnification similar to the indemnification they would receive from other
public companies and thus to compete with those companies for the most
qualified candidates.
Existence of APF. Under Section 11.1 of the Existing Articles, APF
automatically will terminate and dissolve on December 31, 2005 unless the APF
Shares are listed on a national securities exchange or over-the-counter market,
in which event APF automatically will become a perpetual life entity. In
contemplation of
13
<PAGE>
listing the APF Shares on the NYSE, this provision is modified in the Restated
Articles to provide for APF's perpetual duration.
Issuance of Stock Certificates. Section 7.5 of the Existing Articles
provides that APF shall not issue stock certificates, but instead shall
maintain stock ownership records on its books. Because APF will be required to
issue stock certificates following listing pursuant to the rules of the NYSE,
this provision has been deleted from the Restated Articles.
Conforming Changes and Other Ministerial Modifications. The Restated
Articles reflect a number of conforming changes and other modifications of a
ministerial nature that are necessary in view of the other modifications being
proposed. These changes and modifications include, among other things, deletion
and revision of definitions, references and cross-references and the re-
numbering and lettering of remaining provisions. The Restated Articles also
eliminate provisions of the Existing Articles that were relevant only in the
context of APF's initial public offering, which was completed in early 1997
(for example, the limitations on initial public offering expenses under Section
3.2(vii) of the Existing Articles) and provisions contemplating listing on a
national securities exchange or over-the-counter market (such as the provision
in Section 5.1(iv) that obligates APF to list the APF Shares or sell its assets
within 5 to 10 years after the initial public offering). All of these changes
are indicated in the marked version of the Existing Articles in Exhibit B to
this Proxy Statement.
14
<PAGE>
SECURITY OWNERSHIP
The following table sets forth, as of June 15, 1999, the number and
percentage of shares beneficially owned by all persons known by APF to own
beneficially more than 5% of the total APF Shares outstanding, by each director
or named executive officer and by all executive officers and directors as a
group, based solely upon information furnished to APF by such stockholders,
executive officers and directors. Unless otherwise noted below, the persons
named in the table have the sole voting and sole investment power with respect
to each of the shares beneficially owned by them.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of APF
of Beneficial Owner Beneficially Owned Shares Outstanding
- ------------------- ------------------ ------------------
<S> <C> <C>
James M. Seneff, Jr..................... 10,000(1) *
400 East South Street
Orlando, FL 32801
Robert A. Bourne........................ -- *
400 East South Street
Orlando, FL 32801
G. Richard Hostetter ................... 2,740(2) *
SunTrust Bank of Chattanooga, N.A.
P.O. Box 1638
Mail Code M0321
Chattanooga, TN 37401
Richard C. Huseman...................... -- *
3000 University Boulevard, Suite 251
Winter Park, FL 32792
J. Joseph Kruse......................... -- *
494 Woonasquatucket Avenue, Unit 114
North Providence, RI 02911
All directors and executive officers as
a group (10 persons)................... 12,740(1)(2) *
</TABLE>
- --------
* Less than 1%.
(1) Represents shares held by the CNL Group, Inc., of which Mr. Seneff is a
principal stockholder.
(2) Represents shares held by SunTrust Bank of Chattanooga, on behalf of Mr.
Hostetter, in an individual retirement account.
For pro forma beneficial ownership information based on the assumption that
there will be 70,526,807 APF Shares outstanding (net of expenses to be paid by
the Income Funds in the form of a reduction in the number of APF Shares paid to
each Income Fund and assuming no limited partners of the Income Funds elect to
receive the notes) following the acquisitions if all of the Income Funds are
acquired, see the table under the caption "COMMON STOCK OWNERSHIP AFTER THE
ACQUISITIONS" in the Information Memorandum attached as Exhibit C to this Proxy
Statement.
15
<PAGE>
PROPOSALS FOR NEXT ANNUAL MEETING
Any stockholder proposal to be considered for inclusion in APF's proxy
statement and form of proxy for the annual meeting of stockholders to be held
in 2000 must be received at APF's office at 400 East South Street, Orlando,
Florida 32801, no later than December 15, 1999.
Under APF's bylaws, a stockholder must comply with certain procedures to
nominate directors or to propose other matters to be considered at an annual
meeting of stockholders. These procedures provide that the stockholders
desiring to make nominations for directors or to bring a proper subject before
a meeting must do so by notice timely delivered to APF's secretary. To be
timely, the secretary must receive the notice at APF's principal executive
offices not less than 60 days nor more than 90 days before the anniversary of
the preceding year's annual meeting of stockholders. In the case of APF's
annual meeting of stockholders in 2000, APF's secretary must receive notice of
any such proposal no earlier than February 27, 2000 and no later than March 28,
2000 (other than proposals intended to be included in the proxy statement and
form of proxy which, as noted above, must be received by December 15, 1999).
Generally, such notice must set forth: (1) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations or proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (2) as
to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and of the beneficial
owner, if any, on whose behalf the proposal is made; (3) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, the name and address of such stockholder, as
they appear on APF's books, and of such beneficial owner and the class and
number of APF Shares which are owned beneficially and of record by such
stockholder and such beneficial owner. The Chairman of the annual meeting shall
have the power to declare that any proposal not meeting these and any other
applicable requirements imposed by the bylaws shall be disregarded. A copy of
the bylaws may be obtained without charge on written request addressed to CNL
American Properties Fund, Inc., Attn. Corporate Secretary, 400 East South
Street, Orlando, Florida 32801.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP has served as APF's independent accountants for
APF's current and most recently completed fiscal years. A representative of
PricewaterhouseCoopers LLP will be present at the Special Meeting and will be
provided with the opportunity to make a statement if desired. Such
representative will also be available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented at the
Special Meeting other than those stated above. If any other business should
come before the Special Meeting, the person(s) named in the enclosed proxy will
vote thereon as he, she or they determine to be in the best interests of APF.
By Order of the Board of Directors,
-------------------------------------
Lynn E. Rose
Secretary
, 1999
Orlando, Florida
16
<PAGE>
PROXY
CNL AMERICAN PROPERTIES FUND, INC.
The undersigned hereby appoints James M. Seneff, Jr. and Robert A. Bourne,
and each of them, as proxies, with full power of substitution in each, to vote
all shares of common stock of CNL American Properties Fund, Inc., or APF, which
the undersigned is entitled to vote, at a Special Meeting of Stockholders of
APF to be held on , 1999 at 10:30 a.m., local time, and any adjournment
thereof, on all matters set forth in the Notice of Special Meeting and Proxy
Statement, dated , 1999, a copy of which has been received by the
undersigned, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING ITEMS:
1. Proposal to Approve Changing APF's Name to CNL Restaurant Properties,
Inc.:
[_]FOR [_]AGAINST [_]ABSTAIN
2. Proposal to Approve Increasing the number of Authorized APF Shares to
from 62,500,000 to 137,500,000 shares:
[_]FOR [_]AGAINST [_]ABSTAIN
3. Proposal to Effect the Restated Changes to the Existing Articles as
set forth in the Restated Articles:
[_]FOR [_]AGAINST [_]ABSTAIN
4. Other Matters:
Grant authority upon such other matters as may come before the Special
Meeting as they determine to be in the best interest of APF.
[_]FOR [_]AGAINST [_]ABSTAIN
(PLEASE SIGN AND DATE THIS PROXY ON THE REVERSE SIDE,AND RETURN IN
ENCLOSED ENVELOPE)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
IF YOU SIGN, DATE AND MAIL YOUR PROXY WITHOUT INDICATING HOW YOU WANT TO
VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE "FOR" THE MATTERS STATED. IF YOU
FAIL TO RETURN YOUR PROXY, YOUR PROXY WILL NOT BE COUNTED. EACH STOCKHOLDER IS
URGED TO SUBMIT A SIGNED AND DATED PROXY.
Dated:
Signature(s) of Stockholder(s):
IMPORTANT: Please mark this Proxy, date it, sign it exactly as your name(s)
appear(s) and return it in the enclosed postage paid envelope. Joint owners
should each sign personally. Trustees and others signing in a representative or
fiduciary capacity should indicate their full titles in such capacity.
17
<PAGE>
Exhibit A
APF's Restated Articles (clean version)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CNL RESTAURANT PROPERTIES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article I: THE COMPANY; DEFINITIONS.............................. A-1
1.1 Name........................................................ A-1
1.2 Resident Agent.............................................. A-1
1.3 Nature of Company........................................... A-1
1.4 Purposes.................................................... A-1
1.5 Definitions................................................. A-1
Article II: BOARD OF DIRECTORS................................... A-3
2.1 Number...................................................... A-3
2.2 Committees.................................................. A-4
2.3 Initial Board; Term......................................... A-4
2.4 Fiduciary Obligations....................................... A-4
2.5 Resignation, Removal or Death............................... A-4
2.6 Business Combination Statute................................ A-5
2.7 Control Share Acquisition Statute........................... A-5
Article III: POWERS OF DIRECTORS................................. A-5
3.1 General..................................................... A-5
3.2 Specific Powers and Authority............................... A-5
3.3 Determination of Best Interest of Company................... A-9
Article IV: INVESTMENT OBJECTIVES AND OPERATING RESTRICTIONS..... A-9
4.1 Investment Objectives....................................... A-9
4.2 Operating Restrictions...................................... A-10
Article V: SHARES................................................ A-10
5.1 Authorized Shares........................................... A-10
5.2 Common Shares............................................... A-10
5.3 Preferred Shares............................................ A-11
5.4 General Nature of Shares.................................... A-12
5.5 Restrictions On Ownership and Transfer...................... A-12
5.6 Excess Shares............................................... A-18
5.7 Settlements................................................. A-21
5.8 Severability................................................ A-21
5.9 Waiver...................................................... A-21
Article VI: STOCKHOLDERS......................................... A-21
6.1 Meetings of Stockholders.................................... A-21
6.2 Voting Rights of Stockholders............................... A-22
6.3 Stockholder Action to be Taken by Meeting................... A-22
6.4 Right of Inspection......................................... A-22
6.5 Access to Stockholder List.................................. A-22
6.6 Reports..................................................... A-23
Article VII: LIABILITY; TRANSACTIONS BETWEEN AFFILIATES
AND THE COMPANY..................................... A-23
7.1 Limitation of Stockholder Liability......................... A-23
7.2 Exculpation................................................. A-23
7.3 Indemnification............................................. A-23
7.4 Express Exculpatory Clauses In Instruments.................. A-23
7.5 Transactions with Affiliates................................ A-24
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
Article VIII : AMENDMENT; REORGANIZATION; MERGER, ETC...................... A-24
8.1 Amendment............................................................ A-24
8.2 Reorganization....................................................... A-24
8.3 Merger, Consolidation or Sale of Company Property.................... A-25
Article IX : DURATION OF COMPANY........................................... A-26
9.1 Perpetual Existence.................................................. A-26
Article X : MISCELLANEOUS.................................................. A-26
10.1 Governing Law....................................................... A-26
10.2 Reliance by Third Parties........................................... A-26
10.3 Provisions in Conflict with Law or Regulations...................... A-26
10.4 Construction........................................................ A-26
10.5 Recordation......................................................... A-27
</TABLE>
-ii-
<PAGE>
ARTICLE I:
THE COMPANY; DEFINITIONS
1.1 Name.
The name of the corporation (the "Company") is:
CNL Restaurant Properties, Inc.
So far as may be practicable, the business of the Company shall be conducted
and transacted under that name, which name, and the word "Company" wherever
used in these Second Amended and Restated Articles of Incorporation of CNL
Restaurant Properties, Inc. (these "Articles of Incorporation"), except where
the context otherwise requires, shall refer to the Directors collectively but
not individually or personally and shall not refer to the Stockholders or to
any officers, employees or agents of the Company or of such Directors.
Under circumstances in which the Directors determine that the use of the
name "CNL Restaurant Properties, Inc." is not practicable, they may use any
other designation or name for the Company.
1.2 Resident Agent.
The name and address of the resident agent for service of process of the
Company in the State of Maryland shall be The Corporation Trust Incorporated,
32 South Street, Baltimore, Maryland 21202. The Company may have such principal
office within the State of Maryland as the Directors may from time to time
determine. The Company may also have such other offices or places of business
within or without the State of Maryland as the Directors may from time to time
determine.
1.3 Nature of Company.
The Company is a Maryland corporation within the meaning of the MGCL.
1.4 Purposes.
The purposes for which the Company is formed are to conduct any business for
which corporations may be organized under the laws of the State of Maryland
including, but not limited to, the following: (i) to acquire, hold, own,
develop, construct, improve, maintain, operate, sell, lease, transfer,
encumber, convey, exchange and otherwise dispose of or deal with real and
personal property; (ii) to engage in the business of offering furniture,
fixture, and equipment financing to operators of Restaurant Chains; and (iii)
to enter into any partnership, joint venture or other similar arrangement to
engage in any of the foregoing.
1.5 Definitions.
As used in these Articles of Incorporation, the following terms shall have
the following meanings unless the context otherwise requires (certain other
terms used in Article V hereof are defined in Sections 5.2, 5.3, 5.5 and 5.6
hereof):
"Affiliate" or "Affiliated" means, as to any individual, corporation,
partnership, trust or other association (other than the Excess Shares Trust),
(i) any Person or entity directly or indirectly, through one or more
intermediaries controlling, controlled by, or under common control with another
person or entity; (ii) any Person or entity, directly or indirectly owning or
controlling ten percent (10%) or more of the outstanding voting securities of
another Person or entity; (iii) any officer, director, partner or trustee of
such Person or entity; (iv) any Person ten percent (10%) or more of whose
outstanding voting securities are directly or indirectly owned, controlled, or
held, with power to vote, by such other Person; and (v) if such other Person or
entity is an officer, director, partner, or trustee of a Person or entity, the
Person or entity for which such Person or entity acts in any such capacity.
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"Bylaws" means the bylaws of the Company, as the same are in effect from
time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute thereto. Reference to any provision of the Code
shall mean such provision as in effect from time to time, as the same may be
amended, and any successor provision thereto, as interpreted by any applicable
regulations as in effect from time to time.
"Company Property" means any and all property, real, personal or otherwise,
tangible or intangible, including without limitation mortgage loans, interests
in trust certificates and Secured Equipment Leases, which is transferred or
conveyed to the Company (including all rents, income, profits and gains
therefrom), which is owned or held by, or for the account of, the Company.
"Directors," "Board of Directors" or "Board" means, collectively, the
individuals named in Section 2.3 of these Articles of Incorporation so long as
they continue in office and all other individuals who have been duly elected
and qualify as Directors of the Company hereunder.
"Distributions" means any distributions of money or securities by the
Company to owners of Shares, including distributions that may constitute a
return of capital for federal income tax purposes. The Company will make no
distributions other than distributions of money or securities.
"Equity Shares" means transferable shares of beneficial interest of the
Company of any class or series, including Common Shares or Preferred Shares.
"Listing" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
"MGCL" means the Maryland General Corporation Law as contained in the
Corporations and Associations Article of the Annotated Code of Maryland.
"Mortgages" means mortgages, deeds of trust or other security interests on
or applicable to Real Property.
"Net Assets" means the total assets of the Company (other than intangibles),
at cost, before deducting depreciation or other non-cash reserves, less total
liabilities, calculated quarterly by the Company on a basis consistently
applied.
"Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company or other entity, or any government or any agency or political
subdivision thereof, and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, but does not include an underwriter that participates in a public
offering of Equity Shares for a period of sixty (60) days following the initial
purchase by such underwriter of such Equity Shares in such public offering,
provided that the foregoing exclusion shall apply only if the ownership of such
Equity Shares by an underwriter would not cause the Company to fail to qualify
as a REIT by reason of being "closely held" within the meaning of Section
856(a) of the Code or otherwise cause the Company to fail to qualify as a REIT.
"Property" or "Properties" means (i) the real properties, including the
buildings located thereon, (ii) the real properties only, or (iii) the
buildings only, which are acquired by the Company, either directly or through
joint venture arrangements or other partnerships or similar arrangements.
"Real Property" or "Real Estate" means land, rights in land (including
leasehold interests), and any buildings, structures, improvements, furnishings,
fixtures and equipment located on or used in connection with land and rights or
interests in land.
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"REIT" means a "real estate investment trust" as defined pursuant to
Sections 856 through 860 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code and
any successor or other provisions of the Code relating to real estate
investment trusts (including provisions as to the attribution of ownership of
beneficial interests therein) and the regulations promulgated thereunder.
"Restaurant Chains" shall mean the national and regional restaurant chains,
primarily fast-food, family-style, and casual dining chains who themselves or
through their franchisees will either (i) lease the Properties purchased by the
Company or (ii) become lessees of Secured Equipment Leases.
"Roll-Up Entity" shall mean a partnership, real estate investment trust,
corporation, trust or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" shall mean a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities of the Company that have been listed on
a national securities exchange or included for quotation on the National Market
System of the National Association of Securities Dealers Automated Quotation
System for at least 12 months; or (ii) a transaction involving the conversion
to corporate, trust, or association form of only the Company if, as a
consequence of the transaction, there will be no significant adverse change in
Stockholder voting rights, the term of existence of the Company or the
investment objectives of the Company.
"Secured Equipment Leases" means furniture, fixtures and equipment financing
made available by the Company.
"Securities" means Equity Shares, Excess Shares, any other stock, shares or
other evidences of equity or beneficial or other interests, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in, temporary or interim certificates for, receipts
for, guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire, any of the foregoing.
"Shares" means shares of beneficial interest of the Company of any class or
series, including Common Shares, Preferred Shares and Excess Shares.
"Stockholders" means the registered holders of the Company's Equity Shares.
ARTICLE II:
BOARD OF DIRECTORS
2.1 Number.
The number of Directors initially shall be five (5), which number may be
increased or decreased from time to time by resolution of the Directors then in
office or by a majority vote of the Stockholders entitled to vote; provided,
however, that the total number of Directors shall be not fewer than three (3)
and not more than fifteen (15), subject to the Bylaws and to any express rights
of any holders of any series of Preferred Shares to elect additional directors
under specified circumstances. No reduction in the number of Directors shall
cause the removal of any Director from office prior to the expiration of his
term. Any vacancy created by an increase in the number of Directors will be
filled, at any regular meeting or at any special meeting of the Directors
called for that purpose, by a majority of the Directors. Any other vacancy will
be filled at any annual meeting or at any special meeting of the Stockholders
called for that purpose, by a majority of the Common Shares
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outstanding and entitled to vote. For the purposes of voting for directors,
each Share of stock may be voted for as many individuals as there are directors
to be elected and for whose election the Share is entitled to be voted, or as
may otherwise be required by the MGCL or other applicable law as in effect from
time to time.
2.2 Committees.
Subject to the MGCL, the Directors may establish such committees as they
deem appropriate, in their discretion.
2.3 Initial Board; Term.
The initial Directors are James M. Seneff, Jr., Robert A. Bourne, G. Richard
Hostetter, J. Joseph Kruse and Richard C. Huseman. Each Director shall hold
office for one (1) year, until the next annual meeting of Stockholders and
until his successor shall have been duly elected and shall have qualified.
Directors may be elected to an unlimited number of successive terms.
The names and address of the initial Directors are as follows:
<TABLE>
<CAPTION>
Name Address
---- ----------------------
<S> <C>
James M. Seneff, Jr................................. 400 E. South Street
Orlando, Florida 32801
Robert A. Bourne.................................... 400 E. South Street
Orlando, Florida 32801
G. Richard Hostetter................................ 400 E. South Street
Orlando, Florida 32801
J. Joseph Kruse..................................... 400 E. South Street
Orlando, Florida 32801
Richard C. Huseman.................................. 400 E. South Street
Orlando, Florida 32801
</TABLE>
2.4 Fiduciary Obligations.
The Directors serve in a fiduciary capacity to the Company and have a
fiduciary duty to the Stockholders of the Company.
2.5 Resignation, Removal or Death.
Any Director may resign by written notice to the Board of Directors,
effective upon execution and delivery to the Company of such written notice or
upon any future date specified in the notice. A Director may be removed from
office with or without cause only at a meeting of the Stockholders called for
that purpose, by the affirmative vote of the holders of not less than a
majority of the Common Shares then outstanding and entitled to vote in the
election of the Directors, subject to the rights of any Preferred Shares to
vote for such 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
should be removed. Upon the resignation or removal of any Director, or his
otherwise ceasing to be a Director, he shall automatically cease to have any
such right, title or interest in and to the Company Property and shall execute
and deliver such documents as the remaining Directors require for the
conveyance of any Company Property held in his name, and shall account to the
remaining Directors as they require for all property which he holds as
Director. Upon the incapacity or death of any Director, his legal
representative shall perform the acts described in the foregoing sentence.
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2.6 Business Combination Statute.
Notwithstanding any other provision of these Articles of Incorporation or
any contrary provision of law, the Maryland Business Combination Statute, found
in Title 3, subtitle 6 of the MGCL, as amended from time to time, or any
successor statute thereto, shall not apply to any "business combination" (as
defined in Section 3-601(e) of the MGCL, as amended from time to time, or any
successor statute thereto) of the Company and any Person.
2.7 Control Share Acquisition Statute.
Notwithstanding any other provision of these Articles of Incorporation or
any contrary provision of law, the Maryland Control Share Acquisition Statute,
found in Title 3, subtitle 7 of the MGCL, as amended from time to time, or any
successor statute thereto shall not apply to any acquisition of Securities of
the Company by any Person.
ARTICLE III:
POWERS OF DIRECTORS
3.1 General.
Subject to the express limitations herein or in the Bylaws and to the
general standard of care required of directors under the MGCL and other
applicable law, (i) the business and affairs of the Company shall be managed
under the direction of the Board of Directors and (ii) the Directors shall have
full, exclusive and absolute power, control and authority over the Company
Property and over the business of the Company as if they, in their own right,
were the sole owners thereof, except as otherwise limited by these Articles of
Incorporation. The Directors have established the written policies on
investments set forth in Article IV hereof and shall monitor the administrative
procedures, investment operations, and performance of the Company to assure
that such policies are carried out. The Directors may take any actions that, in
their sole judgment and discretion, are necessary or desirable to conduct the
business of the Company. A majority of the Board of Directors has approved
these Articles of Incorporation, which shall be construed with a presumption in
favor of the grant of power and authority to the Directors. Any construction of
these Articles of Incorporation or determination made in good faith by the
Directors concerning their powers and authority hereunder shall be conclusive.
The enumeration and definition of particular powers of the Directors included
in this Article III shall in no way be limited or restricted by reference to or
inference from the terms of this or any other provision of these Articles of
Incorporation or construed or deemed by inference or otherwise in any manner to
exclude or limit the powers conferred upon the Directors under the general laws
of the State of Maryland as now or hereafter in force.
3.2 Specific Powers and Authority.
Subject only to the express limitations herein, and in addition to all other
powers and authority conferred by these Articles of Incorporation or by law,
the Directors, without any vote, action or consent by the Stockholders, shall
have and may exercise, at any time or times, in the name of the Company or on
its behalf the following powers and authorities:
(i) Investments. Subject to Article IV and Section 7.5 hereof, to invest
in, purchase or otherwise acquire and to hold real, personal or mixed,
tangible or intangible, property of any kind wherever located, or rights or
interests therein or in connection therewith, all without regard to whether
such property, interests or rights are authorized by law for the investment
of funds held by trustees or other fiduciaries, or whether obligations the
Company acquires have a term greater or lesser than the term of office of
the Directors, for such consideration as the Directors may deem proper
(including cash, property of any kind or Securities of the Company);
provided, however, that the Directors shall take such actions as they deem
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necessary and desirable to comply with any requirements of the MGCL
relating to the types of assets held by the Company.
(ii) REIT Qualification. The Board of Directors shall use its best
efforts to cause the Company and its Stockholders to qualify for U.S.
federal income tax treatment in accordance with the provisions of the Code
applicable to REITs (as those terms are defined in Section 1.5 hereof). In
furtherance of the foregoing, the Board of Directors shall use its best
efforts to take such actions as are necessary, and may take such actions as
it deems desirable (in its sole discretion) to preserve the status of the
Company as a REIT; provided, however, that in the event that the Board of
Directors determines, by vote of at least two-thirds (2/3) of the
Directors, that it no longer is in the best interests of the Company to
qualify as a REIT, the Board of Directors shall take such actions as are
required by the Code, the MGCL and other applicable law, to cause the
matter of termination of qualification as a REIT to be submitted to a vote
of the Stockholders of the Company pursuant to Section 6.2.
(iii) Sale, Disposition and Use of Property. Subject to Article IV and
Sections 7.5 and 8.3 hereof, to sell, rent, lease, hire, exchange, release,
partition, assign, mortgage, grant security interests in, encumber,
negotiate, dedicate, grant easements in and options with respect to,
convey, transfer (including transfers to entities wholly or partially owned
by the Company or the Directors) or otherwise dispose of any or all of the
Company Property by deeds (including deeds in lieu of foreclosure with or
without consideration), trust deeds, assignments, bills of sale, transfers,
leases, mortgages, financing statements, security agreements and other
instruments for any of such purposes executed and delivered for and on
behalf of the Company or the Directors by one or more of the Directors or
by a duly authorized officer, employee, agent or nominee of the Company, on
such terms as they deem appropriate; to give consents and make contracts
relating to the Company Property and its use or other property or matters;
to develop, improve, manage, use, alter or otherwise deal with the Company
Property; and to rent, lease or hire from others property of any kind;
provided, however, that the Company may not use or apply land for any
purposes not permitted by applicable law.
(iv) Financings. To borrow or, in any other manner, raise money for the
purposes and on the terms they determine, which terms may (i) include
evidencing the same by issuance of Securities of the Company and (ii) may
have such provisions as the Directors determine; to reacquire such
Securities of the Excess Shares Trust; to enter into other contracts or
obligations on behalf of the Excess Shares Trust; to guarantee, indemnify
or act as surety with respect to payment or performance of obligations of
any Person; to mortgage, pledge, assign, grant security interests in or
otherwise encumber the Company Property to secure any such Securities of
the Company, contracts or obligations (including guarantees,
indemnifications and suretyships); and to renew, modify, release,
compromise, extend, consolidate or cancel, in whole or in part, any
obligation to or of the Company or participate in any reorganization of
obligors to the Company.
(v) Lending. Subject to the provisions of Section 7.5 hereof, to lend
money or other Company Property on such terms, for such purposes and to
such Persons as they may determine.
(vi) Secured Equipment Leases. To engage in the business of offering
furniture, fixture, and equipment financing to the operators of Restaurant
Chains, provided, however, that the Company shall use its best efforts to
ensure that the total value of Secured Equipment Leases, in the aggregate
will not exceed 25% of the Company's total assets and that Secured
Equipment Leases to a single lessee, in the aggregate, will not exceed 5%
of the Company's total assets.
(vii) Issuance of Securities. Subject to the provisions of Article V
hereof, to create and authorize and direct the issuance (on either a pro
rata or a non-pro rata basis) by the Company, in shares, units or amounts
of one or more types, series or classes, of Securities of the Company,
which may have such voting rights, dividend or interest rates, preferences,
subordinations, conversion or redemption prices or rights; maturity dates,
distribution, exchange, or liquidation rights or other rights as the
Directors may determine, without vote of or other action by the
Stockholders, to such Persons for such consideration, at such time or times
and in such manner and on such terms as the Directors determine, to list
any of the
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Securities of the Company on any securities exchange; and to purchase or
otherwise acquire, hold, cancel, reissue, sell and transfer any Securities
of the Company.
(viii) Expenses and Taxes. To pay any charges, expenses or liabilities
necessary or desirable, in the sole discretion of the Directors, for
carrying out the purposes of these Articles of Incorporation and conducting
business of the Company, including compensation or fees to Directors,
officers, employees and agents of the Company, and to Persons contracting
with the Company, and any taxes, levies, charges and assessments of any
kind imposed upon or chargeable against the Company, the Company Property
or the Directors in connection therewith; and to prepare and file any tax
returns, reports or other documents and take any other appropriate action
relating to the payment of any such charges, expenses or liabilities.
(ix) Collection and Enforcement. To collect, sue for and receive money
or other property due to the Company; to consent to extensions of the time
for payment, or to the renewal, of any Securities or obligations; to engage
or to intervene in, prosecute, defend, compound, enforce, compromise,
release, abandon or adjust any actions, suits, proceedings, disputes,
claims, demands, security interests or things relating to the Company, the
Company Property or the Company's affairs; to exercise any rights and enter
into any agreements and take any other action necessary or desirable in
connection with the foregoing.
(x) Deposits. To deposit funds or Securities constituting part of the
Company Property in banks, trust companies, savings and loan associations,
financial institutions and other depositories, whether or not such deposits
will draw interest, subject to withdrawal on such terms and in such manner
as the Directors determine.
(xi) Allocation; Accounts. To determine whether moneys, profits or other
assets of the Company shall be charged or credited to, or allocated
between, income and capital, including whether or not to amortize any
premium or discount and to determine in what manner any expenses or
disbursements are to be borne as between income and capital (regardless of
how such items would normally or otherwise be charged to or allocated
between income and capital without such determination); to treat any
dividend or other distribution on any investment as, or apportion it
between, income and capital; in their discretion to provide reserves for
depreciation, amortization, obsolescence or other purposes in respect of
any Company Property in such amounts and by such methods as they determine;
to determine what constitutes net earnings, profits or surplus; to
determine the method or form in which the accounts and records of the
Company shall be maintained; and to allocate to the Stockholders' equity
account less than all of the consideration paid for Securities and to
allocate the balance to paid-in capital or capital surplus.
(xii) Valuation of Property. To determine the value of all or any part
of the Company Property and of any services, Securities, property or other
consideration to be furnished to or acquired by the Company, and to revalue
all or any part of the Company Property, all in accordance with such
appraisals or other information as are reasonable, in their sole judgment.
(xiii) Ownership and Voting Powers. To exercise all of the rights,
powers, options and privileges pertaining to the ownership of any
Mortgages, Securities, Real Estate, Secured Equipment Leases and other
Company Property to the same extent that an individual owner might,
including without limitation to vote or give any consent, request or notice
or waive any notice, either in person or by proxy or power of attorney,
which proxies and powers of attorney may be for any general or special
meetings or action, and may include the exercise of discretionary powers.
(xiv) Officers, Etc.; Delegation of Powers. To elect, appoint or employ
such officers for the Company and such committees of the Board of Directors
with such powers and duties as the Directors may determine, the Company's
Bylaws provide or the MGCL requires; to engage, employ or contract with and
pay compensation to any Person (including subject to Section 7.5 hereof,
any Director and Person who is an Affiliate of any Director) as agent,
representative, member of an advisory board, employee or independent
contractor (including advisors, consultants, transfer agents, registrars,
underwriters, accountants, attorneys-at-law, real estate agents, property
and other managers, appraisers, brokers, architects, engineers,
construction managers, general contractors or otherwise) in one or more
capacities,
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to perform such services on such terms as the Directors may determine; to
delegate to one or more Directors, officers or other Persons engaged or
employed as aforesaid or to committees of Directors, the performance of
acts or other things (including granting of consents), the making of
decisions and the execution of such deeds, contracts, leases or other
instruments, either in the names of the Company, the Directors or as their
attorneys or otherwise, as the Directors may determine; and to establish
such committees as they deem appropriate.
(xv) Associations. Subject to Section 7.5 hereof, to cause the Company
to enter into joint ventures, general or limited partnerships,
participation or agency arrangements or any other lawful combinations,
relationships or associations of any kind.
(xvi) Reorganizations, Etc. Subject to Sections 8.2 and 8.3 hereof, to
cause to be organized or assist in organizing any Person under the laws of
any jurisdiction to acquire all or any part of the Company Property, carry
on any business in which the Company shall have an interest or otherwise
exercise the powers the Directors deem necessary, useful or desirable to
carry on the business of the Company or to carry out the provisions of
these Articles of Incorporation, to merge or consolidate the Company with
any Person; to sell, rent, lease, hire, convey, negotiate, assign, exchange
or transfer all or any part of the Company Property to or with any Person
in exchange for Securities of such Person or otherwise; and to lend money
to, subscribe for and purchase the Securities of, and enter into any
contracts with, any Person in which the Company holds, or is about to
acquire, Securities or any other interests.
(xvii) Insurance. To purchase and pay for out of Company Property
insurance policies insuring the Company and the Company Property against
any and all risks, and insuring the Stockholders, Directors, officers,
Affiliates, employees and agents of the Company individually (each an
"Insured") against all claims and liabilities of every nature arising by
reason of holding or having held any such status, office or position or by
reason of any action alleged to have been taken or omitted by the Insured
in such capacity, whether or not the Company would have the power to
indemnify against such claim or liability, provided that such insurance be
limited to the indemnification permitted by Section 7.3 hereof in regard to
any liability or loss resulting from negligence, gross negligence,
misconduct, willful misconduct or an alleged violation of federal or state
securities laws. Nothing contained herein shall preclude the Company from
purchasing and paying for such types of insurance, including extended
coverage liability and casualty and workers' compensation, as would be
customary for any Person owning comparable assets and engaged in a similar
business, or from naming the Insured as an additional insured party
thereunder, provided that such addition does not add to the premiums
payable by the Company.
(xviii) Executive Compensation, Pension and Other Plans. To adopt and
implement executive compensation, pension, profit sharing, share option,
share bonus, share purchase, share appreciation rights, restricted share,
savings, thrift, retirement, incentive or benefit plans, trusts or
provisions, applicable to any or all Directors, officers, employees or
agents of the Company, or to other Persons who have benefited the Company,
all on such terms and for such purposes as the Directors may determine or
the Bylaws provide.
(xix) Distributions. To declare and pay dividends or other distributions
to Stockholders, subject to the provisions of Section 5.4 hereof.
(xx) Indemnification. To the extent permitted by Section 7.3 hereof, to
indemnify any Person with whom the Company has dealings.
(xxi) Charitable Contributions. To make donations for the public welfare
or for community, charitable, religious, educational, scientific, civic or
similar purposes, regardless of any direct benefit to the Company.
(xxii) Discontinue Operations; Bankruptcy. To discontinue the operations
of the Company (subject to Section 8.2 hereof); to petition or apply for
relief under any provision of federal or state bankruptcy, insolvency or
reorganization laws or similar laws for the relief of debtors; to permit
any Company Property to be foreclosed upon without raising any legal or
equitable defenses that may be available to the Company or the Directors or
otherwise defending or responding to such foreclosure; to confess judgment
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against the Excess Shares Trust; or to take such other action with respect
to indebtedness or other obligations of the Directors, the Company Property
or the Company as the Directors, in such capacity, and in their discretion
may determine.
(xxiii) Termination of Status. To terminate the status of the Company as
a real estate investment trust under the REIT Provisions of the Code;
provided, however, that the Board of Directors shall take no action to
terminate the Company's status as a real estate investment trust under the
REIT Provisions of the Code until such time as (i) the Board of Directors
adopts a resolution recommending that the Company terminate its status as a
real estate investment trust under the REIT Provisions of the Code, (ii)
the Board of Directors presents the resolution at an annual or special
meeting of the Stockholders and (iii) such resolution is approved by the
holders of two-thirds (2/3) of the issued and outstanding Common Shares (as
defined in Section 5.2 hereof).
(xxiv) Fiscal Year. Subject to the Code, to adopt, and from time to time
change, a fiscal year for the Company.
(xxv) Seal. To adopt and use a seal, but the use of a seal shall not be
required for the execution of instruments or obligations of the Company.
(xxvi) Bylaws. To adopt, implement and from time to time alter, amend or
repeal the Bylaws of the Company relating to the business and organization
of the Company, provided that such amendments are not inconsistent with the
provisions of these Articles of Incorporation, and further provided that
the Directors may not amend the Bylaws, without the affirmative vote of a
majority of the Equity Shares, to the extent that such amendments adversely
affect the rights, preferences and privileges of Stockholders.
(xxvii) Further Powers. To do all other acts and things and execute and
deliver all instruments incident to the foregoing powers, and to exercise
all powers which they deem necessary, useful or desirable to carry on the
business of the Company or to carry out the provisions of these Articles of
Incorporation, even if such powers are not specifically provided hereby.
3.3 Determination of Best Interest of Company.
In determining what is in the best interest of the Company, a Director shall
consider the interests of the Stockholders of the Company and, in his or her
sole and absolute discretion, may consider (i) the interests of the Company's
employees, suppliers, creditors and customers, (ii) the economy of the nation,
(iii) community and societal interests, and (iv) the long-term as well as
short-term interests of the Company and its Stockholders, including the
possibility that these interests may be best served by the continued
independence of the Company.
ARTICLE IV:
INVESTMENT OBJECTIVES AND OPERATING RESTRICTIONS
4.1 Investment Objectives.
The Company's primary investment objectives are to preserve, protect, and
enhance the Company's assets; while (i) distributing dividends commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and dividends) and
providing protection against inflation through automatic increases in base rent
and receipt of percentage rent, and obtaining fixed income through the receipt
of payments on Secured Equipment Leases; and (iii) qualifying and remaining
qualified as a REIT for federal income tax purposes. The sheltering from tax of
income from other sources is not an objective of the Company. Subject to
Sections 3.2(ii) and (xxiii) hereof and to the restrictions set forth herein,
the Directors will use their best efforts to conduct the affairs of the Company
in such a manner as to continue to qualify the Company for the tax treatment
provided in the REIT Provisions of the Code; provided, however, no Director,
officer, employee or agent of the Company shall be liable for any act or
omission resulting in the loss of tax benefits under the Code, except to the
extent provided in Section 7.2 hereof.
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4.2 Operating Restrictions.
In addition to other investment restrictions imposed by the Directors from
time to time, consistent with the Company's objective of qualifying as a REIT,
the following shall apply to the Company's investments:
(i) The Company shall not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
(ii) The Company will not make any investment that the Company believes
will be inconsistent with its objectives of qualifying and remaining
qualified as a REIT.
The foregoing objectives may not be modified or eliminated without the
approval of Stockholders owning a majority of the outstanding Common Shares.
ARTICLE V:
SHARES
5.1 Authorized Shares.
The capital stock of the Company shall be divided into Shares. The total
number of Shares which the Company is authorized to issue is two hundred
eighteen million five hundred thousand (218,500,000) Shares, consisting of one
hundred thirty-seven million five hundred thousand (137,500,000) Common Shares
(as defined and described in Section 5.2 hereof), three million (3,000,000)
Preferred Shares (as defined and described in Section 5.3 hereof) and seventy-
eight million (78,000,000) Excess Shares (as defined and described in Section
5.6 hereof). All Shares shall be fully paid and nonassessable when issued.
Shares may be issued for such consideration as the Directors determine or, if
issued as a result of a Share dividend or Share split, without any
consideration.
5.2 Common Shares.
(i) Common Shares Subject to Terms of Preferred Shares. The Common Shares
shall be subject to the express terms of any series of Preferred Shares.
(ii) Description. Common Shares (herein so called) shall have a par value of
$.01 per share and shall entitle the holders to one (1) vote per share on all
matters upon which Stockholders are entitled to vote pursuant to Section 6.2
hereof, and shares of a particular class of issued Common Shares shall have
equal dividend, distribution, liquidation and other rights, and shall have no
preference, cumulative, preemptive, appraisal, conversion or exchange rights.
The Directors may classify or reclassify any unissued Common Shares by setting
or changing the number, designation, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of any such Common Shares and, in such event,
the Company shall file for record with the State Department of Assessments and
Taxation of the State of Maryland amended articles in substance and form as
prescribed by Title 2 of the MGCL.
(iii) Distribution Rights. The holders of Common Shares shall be entitled to
receive such Distributions as may be declared by the Board of Directors of the
Company out of funds legally available therefor.
(iv) Dividend or Distribution Rights. The Directors from time to time may
declare and pay to Stockholders such dividends or Distributions in cash or
securities as the Directors in their discretion shall determine. The Directors
shall endeavor to declare and pay such dividends and Distributions as shall be
necessary for the Company to qualify as a real estate investment trust under
the REIT Provisions of the Code; provided, however, Stockholders shall have no
right to any dividend or Distribution unless and until declared by the
Directors. The exercise of the powers and rights of the Directors pursuant to
this Section 5.2(iv) shall be subject to the provisions of any class or series
of Equity Shares at the time outstanding. The receipt by any
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Person in whose name any Equity Shares are registered on the records of the
Company or by his duly authorized agent shall be a sufficient discharge for
all dividends or Distributions payable or deliverable in respect of such
Equity Shares and from all liability to see to the application thereof.
Distributions in kind shall not be permitted, except for distributions of
readily marketable securities; distributions of beneficial interests in a
liquidating trust established for the dissolution of the Company and the
liquidation of its assets in accordance with the terms of these Articles of
Incorporation; or distributions of in-kind property as long as the Directors
(i) advise each Stockholder of the risks associated with direct ownership of
the property; (ii) offer each Stockholder the election of receiving in-kind
property distributions; and (iii) distribute in-kind property only to those
Stockholders who accept the Directors' offer.
(v) Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up, or any distribution of the assets of
the Company, the aggregate assets available for distribution to holders of the
Common Shares (including holders of Excess Shares resulting from the exchange
of Common Shares pursuant to Section 5.5(iii) hereof) shall be determined in
accordance with applicable law. Except as provided below as a consequence of
the limitations on distributions to holders of Excess Shares, each holder of
Common Shares shall be entitled to receive, ratably with (i) each other holder
of Common Shares and (ii) each holder of Excess Shares resulting from the
exchange of Common Shares, that portion of such aggregate assets available for
distribution as the number of the outstanding Common Shares held by such
holder bears to the total number of outstanding Common Shares and Excess
Shares resulting from the exchange of Common Shares then outstanding. Anything
herein to the contrary notwithstanding, in no event shall the amount payable
to a holder of Excess Shares exceed (i) the price per share such holder paid
for the Common Shares in the purported Transfer or Acquisition (as those terms
are defined in Section 5.5(i) or change in capital structure or other
transaction or event that resulted in the Excess Shares or (ii) if the holder
did not give full value for such Excess Shares (as through a gift, a devise or
other event or transaction), a price per share equal to the Market Price (as
that term is defined in Section 5.5(i) for the Common Shares on the date of
the purported Transfer, Acquisition, change in capital structure or other
transaction or event that resulted in such Excess Shares. Any amount available
for distribution in excess of the foregoing limitations shall be paid ratably
to the holders of Common Shares and other holders of Excess Shares resulting
from the exchange of Common Shares to the extent permitted by the foregoing
limitations.
(vi) Voting Rights. Except as may be provided in these Articles of
Incorporation, and subject to the express terms of any series of Preferred
Shares, the holders of the Common Shares shall have the exclusive right to
vote on all matters (as to which a holder of common stock shall be entitled to
vote pursuant to applicable law) at all meetings of the Stockholders of the
Company, and shall be entitled to one (1) vote for each Common Share entitled
to vote at such meeting.
5.3 Preferred Shares.
The Directors are hereby expressly granted the authority to authorize from
time to time the issuance of one or more series of Preferred Shares. Prior to
the issuance of each such series, the Board of Directors, by resolution, shall
fix the number of shares to be included in each series, and the terms, rights,
restrictions and qualifications of the shares of each series, however, the
voting rights for each share of the Preferred Shares shall not exceed voting
rights which bear the same relationship to the voting rights of the Common
Shares as the consideration paid to the Company for each of Preferred Shares
bears to the book value of the Common Shares or the date that such Preferred
Shares are issued. The authority of the Board of Directors with respect to
each series shall include, but not be limited to, determination of the
following:
(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The dividend rate on the shares of the series, if any, whether any
dividends shall be cumulative and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of
the series.
(iii) The redemption rights, including conditions and the price or
prices, if any, for shares of the series.
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(iv) The terms and amounts of any sinking fund for the purchase or
redemption of shares of the series.
(v) The rights of the shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of the
Company, and the relative rights of priority, if any, of payment of shares
of the series.
(vi) Whether the shares of the series shall be convertible into shares
of any other class or series, or any other security, of the Company or any
other corporation or other entity, and, if so, the specification of such
other class or series of such other security, the conversion price or
prices or rate or rates, any adjustments thereof, the date or dates on
which such shares shall be convertible and all other terms and conditions
upon which such conversion may be made.
(vii) Restrictions on the issuance of shares of the same series or of
any other class or series.
(viii) The voting rights of the holders of shares of the series subject
to the limitations contained in this Section 5.3.
(ix) Any other relative rights, preferences and limitations on that
series.
Subject to the express provisions of any other series of Preferred Shares
then outstanding, and notwithstanding any other provision of these Articles of
Incorporation, the Board of Directors may increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares, or
alter the designation or classify or reclassify any unissued shares of a
particular series of Preferred Shares, by fixing or altering, in one or more
respects, from time to time before issuing the shares, the terms, rights,
restrictions and qualifications of the shares of any such series of Preferred
Shares.
5.4 General Nature of Shares.
All Shares shall be personal property entitling the Stockholders only to
those rights provided in these Articles of Incorporation, the MGCL or in the
resolution creating any class or series of Shares. The legal ownership of the
Company Property and the right to conduct the business of the Company are
vested exclusively in the Directors; the Stockholders shall have no interest
therein other than the beneficial interest in the Company conferred by their
Shares and shall have no right to compel any partition, division, dividend or
Distribution of the Company or any of the Company Property. The death of a
Stockholder shall not terminate the Company or give his legal representative
any rights against other Stockholders, the Directors or the Company Property,
except the right, exercised in accordance with applicable provisions of the
Bylaws, to require the Company to reflect on its books the change in ownership
of the Shares. Holders of Shares shall not have any preemptive or other right
to purchase or subscribe for any class of securities of the Company which the
Company may at any time issue or sell.
5.5 Restrictions On Ownership and Transfer.
(i) Definitions. For purposes of Sections 5.5 and 5.6, the following terms
shall have the following meanings:
"Acquire" means the acquisition of Beneficial or Constructive Ownership
of Equity Shares by any means, including, without limitation, the exercise
of any rights under any option, warrant, convertible security, pledge or
other security interest or similar right to acquire shares, but shall not
include the acquisition of any such rights unless, as a result, the
acquiror would be considered a Beneficial Owner or Constructive Owner. The
terms "Acquires" and "Acquisition" shall have correlative meanings.
"Beneficial Ownership" means ownership of Shares by an individual who
would be treated as an owner of such Shares under Section 542(a)(2) of the
Code, either directly or constructively through the application of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code. For
purposes of this definition, the term "individual" shall include any
organization, trust, or other entity that is treated as
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an individual for purposes of Section 542(a)(2) of the Code. The terms
"Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" means a beneficiary of the Excess Shares Trust as
determined pursuant to Section 5.6(i) hereof.
"Closing Price" on any day shall mean the last sale price, regular way
on such day, or, if no such sale takes place on that day, the average of
the closing bid and asked prices, regular way, in either case as reported
on the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange, or
if the affected class or series of Equity Shares are not so listed or
admitted to trading, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange (including the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotation
System) on which the affected class or series of Equity Shares are listed
or admitted to trading, or, if the affected class or series of Equity
Shares are not so listed or admitted to trading, the last quoted price or,
if not quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or, if such system is
no longer in use, the principal automated quotation system then in use, or,
if the affected class or series of Equity Shares are not so quoted by any
such system, the average of the closing bid and asked prices as furnished
by a professional market maker selected by the Board of Directors making a
market in the affected class or series of Equity Shares, or, if there is no
such market maker or such closing prices otherwise are not available, the
fair market value of the affected class or series of Equity Shares as of
such day, as determined by the Board of Directors in its discretion.
"Common Share Ownership Limit" means, with respect to the Common Shares,
nine point eight percent (9.8%) of the outstanding Common Shares, subject
to adjustment pursuant to Section 5.5(x) (but not more than nine point nine
percent (9.9%) of the outstanding Common Shares, as so adjusted) and to the
limitations contained in Section 5.5(xi).
"Constructive Ownership" means ownership of Equity Shares by a Person
who would be treated as an owner of such Equity Shares, either actually or
constructively, directly or indirectly, through the application of Section
318 of the Code, as modified by Section 856(d)(5) thereof. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have correlative meanings.
"Excess Shares Trust" means the trust created pursuant to Section 5.6(i)
hereof.
"Excess Shares Trustee" means the Company as trustee for the Excess
Shares Trust, and any successor trustee appointed by the Company.
"Market Price" means the average of the Closing Prices for the ten (10)
consecutive Trading Days immediately preceding such day (or those days
during such ten (10) Trading Day period for which Closing Prices are
available).
"Ownership Limit" means the Common Share Ownership Limit or the
Preferred Share Ownership Limit, or both, as the context may require.
"Preferred Share Ownership Limit" means, with respect to the Preferred
Shares, nine point eight percent (9.8%) of the outstanding shares of a
particular series of Preferred Shares of the Company, subject to adjustment
pursuant to Section 5.5(x) (but not more than nine point nine percent
(9.9%) of the outstanding Preferred Shares, as so adjusted) and to the
limitations contained in this Section 5.5.
"Purported Beneficial Holder" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the Person for whom the applicable Purported Record Holder
held the Equity Shares that were, pursuant to Section 5.5(iii),
automatically exchanged for Excess Shares upon the occurrence of such event
or transaction. The Purported Beneficial Holder and the Purported Record
Holder may be the same Person.
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"Purported Beneficial Transferee" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the purported
beneficial transferee for whom the Purported Record Transferee would have
acquired Equity Shares if such Transfer or Acquisition which results in
Excess Shares had been valid under Section 5.5(ii). The Purported
Beneficial Transferee and the Purported Record Transferee may be the same
Person.
"Purported Record Holder" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the record holder of the Equity Shares that were, pursuant
to Section 5.5(iii), automatically exchanged for Excess Shares upon the
occurrence of such an event or transaction. The Purported Record Holder and
the Purported Beneficial Holder may be the same Person.
"Purported Record Transferee" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the record holder
of the Equity Shares if such Transfer or Acquisition which results in
Excess Shares had been valid under Section 5.5(ii). The Purported Record
Transferee and the Purported Beneficial Transferee may be the same Person.
"Restriction Termination Date" means the first day on which the Board of
Directors of the Company determines, pursuant to Section 3.2(xxiii) hereof,
that it is no longer in the best interests of the Company to attempt or
continue to qualify as REIT.
"Trading Day" means a day on which the principal national securities
exchange on which the affected class or series of Equity Shares are listed
or admitted to trading is open for the transaction of business or, if the
affected class or series of Equity Shares are not listed or admitted to
trading, shall mean any day other than a Saturday, Sunday or other day on
which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Transfer" means any sale, transfer, gift, hypothecation, assignment,
devise or other disposition of a direct or indirect interest in Equity
Shares or the right to vote or receive dividends on Equity Shares
(including (i) the granting of any option (including any option to acquire
an option or any series of such options) or entering into any agreement for
the sale, transfer or other disposition of Equity Shares or the right to
vote or receive dividends on Equity Shares or (ii) the sale, transfer,
assignment or other disposition of any securities or rights convertible
into or exchangeable for Equity Shares, whether voluntary or involuntary,
of record, constructively or beneficially, and whether by operation of law
or otherwise. The terms "Transfers," "Transferred" and "Transferable" shall
have correlative meanings.
(ii) Ownership and Transfer Limitations.
(a) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.5(ix) and Section 5.7, prior
to the Restriction Termination Date, no Person shall Beneficially or
Constructively Own Equity Shares in excess of the Common or Preferred Share
Ownership Limit.
(b) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.5(ix) and Section 5.7, prior
to the Restriction Termination Date, any Transfer, Acquisition, change in
the capital structure of the Company, other purported change in Beneficial
or Constructive Ownership of Equity Shares or other event or transaction
that, if effective, would result in any Person Beneficially or
Constructively Owning Equity Shares in excess of the Common or Preferred
Share Ownership Limit shall be void ab initio as to the Transfer,
Acquisition, change in the capital structure of the Company, other
purported change in Beneficial or Constructive Ownership or other event or
transaction with respect to that number of Equity Shares which would
otherwise be Beneficially or Constructively Owned by such Person in excess
of the Common or Preferred Share Ownership Limit, and none of the Purported
Beneficial Transferee, the Purported Record Transferee, the Purported
Beneficial Holder or the Purported Record Holder shall acquire any rights
in that number of Equity Shares.
(c) Notwithstanding any other provision of these Articles of
Incorporation, and except as provided in Section 5.7, prior to the
Restriction Termination Date, any Transfer, Acquisition, change in the
capital
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structure of the Company, or other purported change in Beneficial or
Constructive Ownership (including actual ownership) of Equity Shares or
other event or transaction that, if effective, would result in the Equity
Shares being actually owned by fewer than 100 Persons (determined without
reference to any rules of attribution) shall be void ab initio as to the
Transfer, Acquisition, change in the capital structure of the Company,
other purported change in Beneficial or Constructive Ownership (including
actual ownership) with respect to that number of Equity Shares which
otherwise would be owned by the transferee, and the intended transferee or
subsequent owner (including a Beneficial Owner or Constructive Owner) shall
acquire no rights in that number of Equity Shares.
(d) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.7, prior to the Restriction
Termination Date, any Transfer, Acquisition, change in the capital
structure of the Company, other purported change in Beneficial or
Constructive Ownership of Equity Shares or other event or transaction that,
if effective, would cause the Company to fail to qualify as a REIT by
reason of being "closely held" within the meaning of Section 856(h) of the
Code or otherwise, directly or indirectly, would cause the Company to fail
to qualify as a REIT shall be void ab initio as to the Transfer,
Acquisition, change in the capital structure of the Company, other
purported change in Beneficial or Constructive Ownership or other event or
transaction with respect to that number of Equity Shares which would cause
the Company to be "closely held" within the meaning of Section 856(h) of
the Code or otherwise, directly or indirectly, would cause the Company to
fail to qualify as a REIT, and none of the Purported Beneficial Transferee,
the Purported Record Transferee, the Purported Beneficial Holder or the
Purported Record Holder shall acquire any rights in that number of Equity
Shares.
(e) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.7, prior to the Restriction
Termination Date, any Transfer, Acquisition, change in capital structure of
the Company, or other purported change in Beneficial or Constructive
Ownership of Equity Shares or other event or transaction that, if
effective, would (i) cause the Company to own (directly or Constructively)
an interest in a tenant that is described in Section 856(d)(2)(B) of the
Code and (ii) cause the Company to fail to satisfy any of the gross income
requirements of Section 856(c) of the Code, shall be void ab initio as to
the Transfer, Acquisition, change in capital structure of the Company,
other purported change in Beneficial or Constructive Ownership or other
event or transaction with respect to that number of Equity Shares which
would cause the Company to own an interest (directly or Constructively) in
a tenant that is described in Section 856(d)(2)(B) of the Code, and none of
the Purported Beneficial Transferee, the Purported Record Transferee, the
Purported Beneficial Holder or the Purported Record Holder shall acquire
any rights in that number of Equity Shares.
(iii) Exchange for Excess Shares.
(a) If, notwithstanding the other provisions contained in this Article
V, at any time prior to the Restriction Termination Date, there is a
purported Transfer, Acquisition, change in the capital structure of the
Company, other purported change in the Beneficial or Constructive Ownership
of Equity Shares or other event or transaction such that any Person would
either Beneficially or Constructively Own Equity Shares in excess of the
Common or Preferred Share Ownership Limit, then, except as otherwise
provided in Section 5.5(ix), such Equity Shares (rounded up to the next
whole number of shares) in excess of the Common or Preferred Share
Ownership Limit automatically shall be exchanged for an equal number of
Excess Shares having terms, rights, restrictions and qualifications
identical thereto, except to the extent that this Article V requires
different terms. Such exchange shall be effective as of the close of
business on the business day next preceding the date of the purported
Transfer, Acquisition, change in capital structure, other change in
purported Beneficial or Constructive Ownership of Equity Shares, or other
event or transaction.
(b) If, notwithstanding the other provisions contained in this Article
V, at any time prior to the Restriction Termination Date, there is a
purported Transfer, Acquisition, change in the capital structure of the
Company, other purported change in the Beneficial or Constructive Ownership
of Equity Shares or other event or transaction which, if effective, would
result in a violation of any of the restrictions
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described in subparagraphs (b), (c), (d) and (e) of Section 5.5(ii) or,
directly or indirectly, would cause the Company for any reason to fail to
qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(h) of the Code, or otherwise, directly or indirectly, would
cause the Company to fail to qualify as a REIT, then the Equity Shares
(rounded up to the next whole number of shares) being Transferred or which
are otherwise affected by the change in capital structure or other
purported change in Beneficial or Constructive Ownership and which, in any
case, would cause the Company to be "closely held" within the meaning of
such Section 856(h) or otherwise would cause the Company to fail to qualify
as a REIT automatically shall be exchanged for an equal number of Excess
Shares having terms, rights, restrictions and qualifications identical
thereto, except to the extent that this Article V requires different terms.
Such exchange shall be effective as of the close of business on the
business day prior to the date of the purported Transfer, Acquisition,
change in capital structure, other purported change in Beneficial or
Constructive Ownership or other event or transaction.
(iv) Remedies For Breach. If the Board of Directors or its designee
shall at any time determine in good faith that a Transfer, Acquisition,
change in the capital structure of the Company or other purported change in
Beneficial or Constructive Ownership or other event or transaction has
taken place in violation of Section 5.5(ii) or that a Person intends to
Acquire or has attempted to Acquire Beneficial or Constructive Ownership of
any Equity Shares in violation of this Section 5.5, the Board of Directors
or its designee shall take such action as it deems advisable to refuse to
give effect to or to prevent such Transfer, Acquisition, change in the
capital structure of the Company, other attempt to Acquire Beneficial or
Constructive Ownership of any Equity Shares or other event or transaction,
including, but not limited to, refusing to give effect thereto on the books
of the Company or instituting injunctive proceedings with respect thereto;
provided, however, that any Transfer, Acquisition, change in the capital
structure of the Company, attempted Transfer or other attempt to Acquire
Beneficial or Constructive Ownership of any Equity Shares or other event or
transaction in violation of subparagraphs (b), (c), (d) and (e) of Section
5.5(ii) (as applicable) shall be void ab initio and where applicable
automatically shall result in the exchange described in Section 5.5(iii),
irrespective of any action (or inaction) by the Board of Directors or its
designee.
(v) Notice of Restricted Transfer. Any Person who acquires or attempts
to Acquire Beneficial or Constructive Ownership of Equity Shares in
violation of Section 5.5(ii) and any Person who Beneficially or
Constructively Owns Excess Shares as a transferee of Equity Shares
resulting in an exchange for Excess Shares, pursuant to Section 5.5(iii),
or otherwise shall immediately give written notice to the Company, or, in
the event of a proposed or attempted Transfer, Acquisition, or purported
change in Beneficial or Constructive Ownership, shall give at least fifteen
(15) days prior written notice to the Company, of such event and shall
promptly provide to the Company such other information as the Company, in
its sole discretion, may request in order to determine the effect, if any,
of such Transfer, attempted Transfer, Acquisition, Attempted Acquisition or
purported change in Beneficial or Constructive Ownership on the Company's
status as a REIT.
(vi) Owners Required To Provide Information. Prior to the Restriction
Termination Date:
(a) Every Beneficial or Constructive Owner of more than five percent
(5%), or such lower percentages as determined pursuant to regulations
under the Code or as may be requested by the Board of Directors, in its
sole discretion, of the outstanding shares of any class or series of
Equity Shares of the Company shall annually, no later than January 31
of each calendar year, give written notice to the Company stating (i)
the name and address of such Beneficial or Constructive Owner; (ii) the
number of shares of each class or series of Equity Shares Beneficially
or Constructively Owned; and (iii) a description of how such shares are
held. Each such Beneficial or Constructive Owner promptly shall provide
to the Company such additional information as the Company, in its sole
discretion, may request in order to determine the effect, if any, of
such Beneficial or Constructive Ownership on the Company's status as a
REIT and to ensure compliance with the Common or Preferred Share
Ownership Limit and other restrictions set forth herein.
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(b) Each Person who is a Beneficial or Constructive Owner of Equity
Shares and each Person (including the Stockholder of record) who is
holding Equity Shares for a Beneficial or Constructive Owner promptly
shall provide to the Company such information as the Company, in its
sole discretion, may request in order to determine the Company's status
as a REIT, to comply with the requirements of any taxing authority or
other governmental agency, to determine any such compliance or to
ensure compliance with the Common or Preferred Share Ownership Limit
and other restrictions set forth herein.
(vii) Remedies Not Limited. Nothing contained in this Article V except
Section 5.7 shall limit scope or application of the provisions of this
Section 5.5, the ability of the Company to implement or enforce compliance
with the terms thereof or the authority of the Board of Directors to take
any such other action or actions as it may deem necessary or advisable to
protect the Company and the interests of its Stockholders by preservation
of the Company's status as a REIT and to ensure compliance with the
Ownership Limits for each class or series of Equity Shares and other
restrictions set forth herein, including, without limitation, refusal to
give effect to a transaction on the books of the Company.
(viii) Ambiguity. In the case of an ambiguity in the application of any
of the provisions of this Section 5.5, including any definition contained
in Sections 1.5 and 5.5(i), the Board of Directors shall have the power and
authority, in its sole discretion, to determine the application of the
provisions of this Section 5.5 with respect to any situation based on the
facts known to it.
(ix) Exception. 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, in each
case to the effect that the restrictions contained in subparagraphs (c),
(d) and (e) of Section 5.5(ii) will not be violated, may waive or change,
in whole or in part, the application of the Common or Preferred Share
Ownership Limit with respect to any Person that is not an individual, as
such term is 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 Shares on the Company's status
as a REIT.
(x) Increase in Common or Preferred Share Ownership Limit. Subject to
the limitations contained in Section 5.5(xi), the Board of Directors may
from time to time increase the Common or Preferred Share Ownership Limit.
(xi) Limitations on Modifications.
(a) The Ownership Limit for a class or series of Equity Shares may
not be increased and no additional ownership limitations may be created
if, after giving effect to such increase or creation, the Company would
be "closely held" within the meaning of Section 856(h) of the Code
(assuming ownership of shares of Equity Shares by all Persons equal to
the greatest of (A) the actual ownership, (B) the Beneficial Ownership
of Equity Shares by each Person, or (C) the applicable Ownership Limit
with respect to such Person.
(b) Prior to any modification of the Ownership Limit with respect to
any Person, the Board of Directors may 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 the Company's status as a REIT.
(c) Neither the Preferred Share Ownership Limit nor the Common Share
Ownership Limit may be increased to a percentage that is greater than
nine point nine percent (9.9%).
(xii) Notice to Stockholders Upon Issuance or Transfer. Upon issuance or
transfer of Shares, the Company shall provide the recipient with a notice
containing information about the shares purchased or otherwise transferred,
in lieu of issuance of a share certificate, in a form substantially similar
to the following:
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"The securities issued or transferred are subject to restrictions on
transfer and ownership for the purpose of maintenance of the Company's
status as a real estate investment trust (a "REIT") under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"). Except as otherwise provided pursuant to the Articles of
Incorporation of the Company, no Person may (i) Beneficially or
Constructively Own Common Shares of the Company in excess of 9.8% (or
such greater percent as may be determined by the Board of Directors of
the Company) of the outstanding Common Shares; (ii) Beneficially or
Constructively Own shares of any series of Preferred Shares of the
Company in excess of 9.8% of the outstanding shares of such series of
Preferred Shares; or (iii) Beneficially or Constructively Own Common
Shares or Preferred Shares (of any class or series) which would result
in the Company being "closely held" under Section 856(h) of the Code or
which otherwise would cause the Company to fail to qualify as a REIT.
Any Person who has Beneficial or Constructive Ownership, or who
Acquires or attempts to Acquire Beneficial or Constructive Ownership of
Common Shares and/or Preferred Shares in excess of the above
limitations and any Person who Beneficially or Constructively Owns
Excess Shares as a transferee of Common or Preferred Shares resulting
in an exchange for Excess Shares (as described below) immediately must
notify the Company in writing or, in the event of a proposed or
attempted Transfer or Acquisition or purported change in Beneficial or
Constructive Ownership, must give written notice to the Company at
least 15 days prior to the proposed or attempted transfer, transaction
or other event. Any Transfer or Acquisition of Common Shares and/or
Preferred Shares or other event which results in violation of the
ownership or transfer limitations set forth in the Company's Articles
of Incorporation shall be void ab initio and the Purported Beneficial
and Record Transferee shall not have or acquire any rights in such
Common Shares and/or Preferred Shares. If the transfer and ownership
limitations referred to herein are violated, the Common Shares or
Preferred Shares represented hereby automatically will be exchanged for
Excess Shares to the extent of violation of such limitations, and such
Excess Shares will be held in trust by the Company, all as provided by
the Articles of Incorporation of the Company. All defined terms used in
this legend have the meanings identified in the Company's Articles of
Incorporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer, will be sent without
charge to each Stockholder who so requests."
5.6 Excess Shares.
(i) Ownership In Trust. Upon any purported Transfer, Acquisition, change in
the capital structure of the Company, other purported change in Beneficial or
Constructive Ownership or event or transaction that results in Excess Shares
pursuant to Section 5.5(iii), such Excess Shares shall be deemed to have been
transferred to the Company, as Excess Shares Trustee of an Excess Shares Trust
for the benefit of such Beneficiary or Beneficiaries to whom an interest in
such Excess Shares may later be transferred pursuant to Section 5.5(v). Excess
Shares so held in trust shall be issued and outstanding stock of the Company.
The Purported Record Transferee (or Purported Record Holder) shall have no
rights in such Excess Shares except the right to designate a transferee of such
Excess Shares upon the terms specified in Section 5.5(v). The Purported
Beneficial Transferee shall have no rights in such Excess Shares except as
provided in Section 5.6(iii) and (v).
(ii) Distribution Rights. Excess Shares shall not be entitled to any
dividends or Distributions (except as provided in Section 5.6(iii)). Any
dividend or Distribution paid prior to the discovery by the Company that the
Equity Shares have been exchanged for Excess Shares shall be repaid to the
Company upon demand, and any dividend or Distribution declared but unpaid at
the time of such discovery shall be void ab initio with respect to such Excess
Shares.
(iii) Rights Upon Liquidation.
(a) Except as provided below, in the event of any voluntary or
involuntary liquidation, dissolution or winding up, or any other
distribution of the assets, of the Company, each holder of Excess Shares
resulting from the exchange of Preferred Shares of any specified series
shall be entitled to receive, ratably with each other holder of Excess
Shares resulting from the exchange of Preferred Shares of such series
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and each holder of Preferred Shares of such series, such accrued and unpaid
dividends, liquidation preferences and other preferential payments, if any,
as are due to holders of Preferred Shares of such series. In the event that
holders of shares of any series of Preferred Shares are entitled to
participate in the Company's distribution of its residual assets, each
holder of Excess Shares resulting from the exchange of Preferred Shares of
any such series shall be entitled to participate, ratably with (A) each
other holder of Excess Shares resulting from the exchange of Preferred
Shares of all series entitled to so participate; (B) each holder of
Preferred Shares of all series entitled to so participate; and (C) each
holder of Common Shares and Excess Shares resulting from the exchange of
Common Shares (to the extent permitted by Section 5.5(iii) hereof), that
portion of the aggregate assets available for distribution (determined in
accordance with applicable law) as the number of shares of such Excess
Shares held by such holder bears to the total number of (1) outstanding
Excess Shares resulting from the exchange of Preferred Shares of all series
entitled to so participate; (2) outstanding Preferred Shares of all series
entitled to so participate; and (3) outstanding Common Shares and Excess
Shares resulting from the exchange of Common Shares. The Company, as holder
of the Excess Shares in trust, or, if the Company shall have been
dissolved, any trustee appointed by the Company prior to its dissolution,
shall distribute ratably to the Beneficiaries of the Excess Shares Trust,
when determined, any such assets received in respect of the Excess Shares
in any liquidation, dissolution or winding up, or any distribution of the
assets, of the Company. Anything to the contrary herein notwithstanding, in
no event shall the amount payable to a holder with respect to Excess Shares
resulting from the exchange of Preferred Shares exceed (A) the price per
share such holder paid for the Preferred Shares in the purported Transfer,
Acquisition, change in capital structure or other transaction or event that
resulted in the Excess Shares or (B) if the holder did not give full value
for such Excess Shares (as through a gift, devise or other event or
transaction), a price per share equal to the Market Price for the shares of
Preferred Shares on the date of the purported Transfer, Acquisition, change
in capital structure or other transaction or event that resulted in such
Excess Shares. Any amount available for distribution in excess of the
foregoing limitations shall be paid ratably to the holders of Preferred
Shares and Excess Shares resulting from the exchange of Preferred Shares to
the extent permitted by the foregoing limitations.
(b) Except as provided below, in the event of any voluntary or
involuntary liquidation, dissolution or winding up, or any other
distribution of the assets, of the Company, each holder of Excess Shares
resulting from the exchange of Common Shares shall be entitled to receive,
ratably with (A) each other holder of such Excess Shares and (B) each
holder of Common Shares, that portion of the aggregate assets available for
distribution to holders of Common Shares (including holders of Excess
Shares resulting from the exchange of Common Shares pursuant to Section
5.5(iii)), determined in accordance with applicable law, as the number of
such Excess Shares held by such holder bears to the total number of
outstanding Common Shares and outstanding Excess Shares resulting from the
exchange of Common Shares then outstanding. The Company, as holder of the
Excess Shares in trust, or, if the Company shall have been dissolved, any
trustee appointed by the Company prior to its dissolution, shall distribute
ratably to the Beneficiaries of the Excess Shares, when determined, any
such assets received in respect of the Excess Shares in any liquidation,
dissolution or winding up, or any distribution of the assets, of the
Company. Anything herein to the contrary notwithstanding, in no event shall
the amount payable to a holder with respect to Excess Shares exceed (A) the
price per share such holder paid for the Equity Shares in the purported
Transfer, Acquisition, change in capital structure or other transaction or
event that resulted in the Excess Shares or (B) if the holder did not give
full value for such Equity Shares (as through a gift, devise or other event
or transaction), a price per share equal to the Market Price for the Equity
Shares on the date of the purported Transfer, Acquisition, change in
capital structure or other transaction or event that resulted in such
Excess Shares. Any amount available for distribution in excess of the
foregoing limitations shall be paid ratably to the holders of Common Shares
and Excess Shares resulting from the exchange of Common Shares to the
extent permitted by the foregoing limitations.
(iv) Voting Rights. The holders of Excess Shares shall not be entitled to
vote on any matters (except as required by the MGCL).
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(v) Restrictions on Transfer; Designation of Beneficiary.
(a) Excess Shares shall not be transferable. The Purported Record
Transferee (or Purported Record Holder) may freely designate a Beneficiary
of its interest in the Excess Shares Trust (representing the number of
Excess Shares held by the Excess Shares Trust attributable to the purported
Transfer or Acquisition that resulted in the Excess Shares), if (A) the
Excess Shares held in the Excess Shares Trust would not be Excess Shares in
the hands of such Beneficiary and (B) the Purported Beneficial Transferee
(or Purported Beneficial Holder) does not receive a price for designating
such Beneficiary that reflects a price per share for such Excess Shares
that exceeds (1) the price per share such Purported Beneficial Transferee
(or Purported Beneficial Holder) paid for the Equity Shares in the
purported Transfer, Acquisition, change in capital structure, or other
transaction or event that resulted in the Excess Shares or (2) if the
Purported Beneficial Transferee (or Purported Beneficial Holder) did not
give value for such Excess Shares (as through a gift, devise or other event
or transaction), a price per share equal to the Market Price for the Equity
Shares on the date of the purported Transfer, Acquisition, change in
capital structure, or other transaction or event that resulted in the
Excess Shares. Upon such transfer of an interest in the Excess Shares
Trust, the corresponding Excess Shares in the Excess Shares Trust
automatically shall be exchanged for an equal number of Equity Shares
(depending on the type and class of Shares that were originally exchanged
for such Excess Shares), and such Equity Shares shall be transferred of
record to the Beneficiary of the interest in the Excess Shares Trust
designated by the Purported Record Transferee (or Purported Record Holder),
as described above, if such Equity Shares would not be Excess Shares in the
hands of such Beneficiary. Prior to any transfer of any interest in the
Excess Shares Trust, the Purported Record Transferee (or Purported Record
Holder) must give advance written notice to the Company of the intended
transfer and the Company must have waived in writing its purchase rights
under Section 5.6(vi).
(b) Notwithstanding the foregoing, if a Purported Beneficial Transferee
(or Purported Beneficial Holder) receives a price for designating a
Beneficiary of an interest in the Excess Shares Trust that exceeds the
amounts allowable under subparagraph (i) of this Section 5.5(v), such
Purported Beneficial Transferee (or Purported Beneficial Holder) shall pay,
or cause the Beneficiary of the interest in the Excess Shares Trust to pay,
such excess in full to the Company.
(c) If any of the transfer restrictions set forth in this Section
5.5(v), or any application thereof, are determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the
Purported Record Transferee (or Purported Record Holder) may be deemed, at
the option of the Company, to have acted as the agent of the Company in
acquiring the Excess Shares as to which such restrictions would otherwise,
by their terms, apply and to hold such Excess Shares on behalf of the
Company.
(vi) Purchase Right in Excess Shares. Excess Shares shall be deemed to have
been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that created
such Excess Shares (or, in the case of devise or gift or event other than a
Transfer or Acquisition which results in the issuance of Excess Shares, the
Market Price at the time of such devise or gift or event other than a Transfer
or Acquisition which results in the issuance of Excess Shares) and (ii) the
Market Price of the Equity Shares exchanged for such Excess Shares on the date
the Company, or its designee, accepts such offer. The Company and its assignees
shall have the right to accept such offer for a period of ninety (90) days
after the later of (i) the date of the purported Transfer, Acquisition, change
in capital structure of the Company, purported change in Beneficial Ownership
or other event or transaction which resulted in such Excess Shares and (ii) the
date on which the Board of Directors determines in good faith that a Transfer,
Acquisition, change in capital structure of the Company, purported change in
Beneficial or Constructive Ownership resulting in Excess Shares has occurred,
if the Company does not receive a notice pursuant to Section 5.5(v), but in no
event later than a permitted Transfer pursuant to and in compliance with the
terms of Section 5.6(v).
(vii) Remedies Not Limited. Nothing contained in this Article V except
Section 5.7 shall limit scope or application of the provisions of this Section
5.6, the ability of the Company to implement or enforce compliance with the
terms hereof or the authority of the Board of Directors to take any such other
action or
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actions as it may deem necessary or advisable to protect the Company and the
interests of its Stockholders by preservation of the Company's status as a REIT
and to ensure compliance with applicable Share Ownership Limits and the other
restrictions set forth herein, including, without limitation, refusal to give
effect to a transaction on the books of the Company.
(viii) Authorization. At such time as the Board of Directors authorizes a
series of Preferred Shares pursuant to Section 5.3 of this Article V, without
any further or separate action of the Board of Directors, there shall be deemed
to be authorized a series of Excess Shares consisting of the number of shares
included in the series of Preferred Shares so authorized and having terms,
rights, restrictions and qualifications identical thereto, except to the extent
that such Excess Shares are already authorized or this Article V requires
different terms.
5.7 Settlements.
Nothing in Sections 5.5 and 5.6 or in any other provision of these Articles
of Incorporation shall preclude the settlement of any transaction with respect
to the Common Shares entered into through the facilities of the New York Stock
Exchange or other national securities exchange on which the Common Shares are
listed.
5.8 Severability.
If any provision of this Article V or any application of any such provision
is determined to be void, invalid or unenforceable by any court having
jurisdiction over the issue, the validity and enforceability of the remaining
provisions of this Article V shall not be affected and other applications of
such provision shall be affected only to the extent necessary to comply with
the determination of such court.
5.9 Waiver.
The Company shall have authority at any time to waive the requirements that
Excess Shares be issued or be deemed outstanding in accordance with the
provisions of this Article V if the Company determines, based on an opinion of
nationally recognized tax counsel, that the issuance of such Excess Shares or
the fact that such Excess Shares are deemed to be outstanding, would jeopardize
the status of the Company as a REIT (as that term is defined in Section 1.5).
ARTICLE VI:
STOCKHOLDERS
6.1 Meetings of Stockholders.
There shall be an annual meeting of the Stockholders, to be held at such
time and place as shall be determined by or in the manner prescribed in the
Bylaws, at which the Directors shall be elected and any other proper business
may be conducted. The annual meeting will be held at a location convenient to
the Stockholders, on a date which is a reasonable period of time following the
distribution of the Company's annual report to Stockholders but not less than
thirty (30) days after delivery of such report. A majority of Stockholders
present in person or by proxy at an annual meeting at which a quorum is
present, may, without the necessity for concurrence by the Directors, vote to
elect the Directors. Special meetings of Stockholders may be called in the
manner provided in the Bylaws, including at any time by Stockholders holding,
in the aggregate, not less than ten percent (10%) of the outstanding Equity
Shares entitled to be cast on any issue proposed to be considered at any such
special meeting. If there are no Directors, the officers of the Company shall
promptly call a special meeting of the Stockholders entitled to vote for the
election of successor Directors. Any meeting may be adjourned and reconvened as
the Directors determine or as provided by the Bylaws.
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6.2 Voting Rights of Stockholders.
Subject to the provisions of any class or series of Shares then outstanding
and the mandatory provisions of any applicable laws or regulations, the
Stockholders shall be entitled to vote only on the following matters; (a)
election or removal of Directors as provided in Sections 2.3, 2.5 and 6.1
hereof; (b) amendment of these Articles of Incorporation as provided in Section
8.1 hereof; (c) reorganization of the Company as provided in Section 8.2
hereof; (d) merger, consolidation or sale or other disposition of all or
substantially all of the Company Property, as provided in Section 8.3 hereof;
and (e) termination of the Company's status as a real estate investment trust
under the REIT Provisions of the Code, as provided in Section 3.2(xxiii)
hereof. The Stockholders may terminate the status of the Company as a REIT
under the Code by a vote of two-thirds of the Shares outstanding and entitled
to vote. Except with respect to the foregoing matters, no action taken by the
Stockholders at any meeting shall in any way bind the Directors.
6.3 Stockholder Action to be Taken by Meeting.
Any action required or permitted to be taken by the Stockholders of the
Company must be effected at a duly called annual or special meeting of
Stockholders of the Company and may not be effected by any consent in writing
of such Stockholders.
6.4 Right of Inspection.
Any Stockholder and any designated representative thereof shall be permitted
access to all records of the Company at all reasonable times, and may inspect
and copy any of them for a reasonable charge. Inspection of the Company books
and records by the office or agency administering the securities laws of a
jurisdiction shall be provided upon reasonable notice and during normal
business hours.
6.5 Access to Stockholder List.
An alphabetical list of the names, addresses and telephone numbers of the
Stockholders of the Company, along with the number of Shares held by each of
them (the "Stockholder List"), shall be maintained as part of the books and
records of the Company and shall be available for inspection by any Stockholder
or the Stockholder's designated agent at the home office of the Company upon
the request of the Stockholder. The Stockholder List shall be updated at least
quarterly to reflect changes in the information contained therein and a copy of
such list shall be mailed to any Stockholder so requesting within ten (10) days
of the request. The Company may impose a reasonable charge for expenses
incurred in reproduction pursuant to the Stockholder request. A Stockholder may
request a copy of the Stockholder List in connection with matters relating to
Stockholders' voting rights, and the exercise of Stockholder rights under
federal proxy laws. The Company may require the Stockholder requesting the
Stockholder List to represent that the list is not requested for a commercial
purpose unrelated to the Stockholder's interest in the Company. The Company may
impose a reasonable charge for expenses incurred in reproducing such
Stockholder List. The Stockholder List may not be used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or mail a
copy of the Stockholder List as requested, the Advisor and the Directors shall
be liable to any Stockholder requesting the list for the costs, including
attorneys' fees, incurred by that Stockholder for compelling the production of
the Stockholder List, and for actual damages suffered by any Stockholder by
reason of such refusal or neglect. It shall be a defense that the actual
purpose and reason for the requests for inspection or for a copy of the
Stockholder List is to secure such list of Stockholders or other information
for the purpose of selling such list or copies thereof, or of using the same
for a commercial purpose other than in the interest of the applicant as a
Stockholder relative to the affairs of the Company. The remedies provided
hereunder to Stockholders requesting copies of the Stockholder List are in
addition, to and shall not in any way limit, other remedies available to
Stockholders under federal law, or the laws of any state.
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6.6 Reports.
The Directors shall take reasonable steps to insure that the Company shall
cause to be prepared and mailed or delivered to each Stockholder as of a record
date after the end of the fiscal year and each holder of other publicly held
securities of the Company an annual report for each fiscal year in accordance
with the requirements of the Securities and Exchange Commission and the New
York Stock Exchange or other national securities exchange on which the
Company's Securities are listed.
ARTICLE VII:
LIABILITY; TRANSACTIONS BETWEEN AFFILIATES AND THE COMPANY
7.1 Limitation of Stockholder Liability.
No Stockholder shall be liable for any debt, claim, demand, judgment or
obligation of any kind of, against or with respect to the Company by reason of
his being a Stockholder, nor shall any Stockholder be subject to any personal
liability whatsoever, in tort, contract or otherwise, to any Person in
connection with the Company Property or the affairs of the Company by reason of
his being a Stockholder. The Company shall include a clause in its contracts
which provides that Stockholders shall not be personally liable for obligations
entered into on behalf of the Company.
7.2 Exculpation.
To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers, no director or officer
of the Company shall be liable to the Company or any of the Stockholders for
money damages. Neither the amendment nor repeal of this Section 7.2, nor the
adoption or amendment of any provision of these Articles of Incorporation
inconsistent with this Section 7.2, shall apply to or affect in any respect the
applicability of the preceding sentence with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
7.3 Indemnification.
Each person who is or was or who agrees to become a director or officer of
the Company, or each person who, while a director of the Company, is or was
serving or who agrees to serve, at the request of the Company, as a director,
officer, partner, joint venture, employee or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
(including the heirs, executor, administrators or estate of such person), shall
be indemnified by the Company, and shall be entitled to have paid on his behalf
or be reimbursed for reasonable expenses in advance of final disposition of a
proceeding, in accordance with the Bylaws of the Company, to the full extent
permitted from time to time by the Maryland General Corporation Law as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment) or any other applicable laws presently or hereafter in effect.
The Company shall have the power, with the approval of the Board of Directors,
to provide such indemnification and advancement of expenses to any employee or
agent of the Company, in accordance with the Bylaws of the Company. Without
limiting the generality or the effect of the foregoing, the Company may enter
into one or more agreements with any person which provide for indemnification
greater or different than that provided in this Article VII. Any amendment or
repeal of this Article VII shall not adversely affect any right or protection
existing hereunder immediately prior to such amendment or repeal.
7.4 Express Exculpatory Clauses In Instruments.
Neither the Stockholders nor the Directors, officers, employees or agents of
the Company shall be liable under any written instrument creating an obligation
of the Company by reason of their being Stockholders,
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Directors, officers, employees or agents of the Company, and all Persons shall
look solely to the Company Property for the payment of any claim under or for
the performance of that instrument. The omission of the foregoing exculpatory
language from any instrument shall not affect the validity or enforceability
of such instrument and shall not render any Stockholder, Director, officer,
employee or agent liable thereunder to any third party, nor shall the
Directors or any officer, employee or agent of the Company be liable to anyone
as a result of such omission.
7.5 Transactions with Affiliates.
The Company may engage in transactions with any Affiliates, subject to any
express restrictions in these Articles of Incorporation (including Article IV
and Section 5.6) or adopted by the Directors in the Bylaws or by resolution,
and further subject to the disclosure and ratification requirements of MGCL
(S) 2-419 and other applicable law.
ARTICLE VIII:
AMENDMENT; REORGANIZATION; MERGER, ETC.
8.1 Amendment.
(i) These Articles of Incorporation may be amended, without the necessity
for concurrence by the Directors, by the affirmative vote of the holders of
not less than a majority of the Shares then outstanding and entitled to vote
thereon, except that (1) no amendment may be made which would change any
rights with respect to any outstanding class of securities, by reducing the
amount payable thereon upon liquidation, or by diminishing or eliminating any
voting rights pertaining thereto; and (2) Section 8.2 hereof and this Section
8.1 shall not be amended (or any other provision of these Articles of
Incorporation be amended or any provision of these Articles of Incorporation
be added that would have the effect of amending such sections), without the
affirmative vote of the holders of two-thirds (2/3) of the Shares then
outstanding and entitled to vote thereon.
(ii) The Directors, by a two-thirds (2/3) vote, may amend provisions of
these Articles of Incorporation from time to time as necessary to enable the
Company to qualify as a real estate investment trust under the REIT Provisions
of the Code. With the exception of the foregoing, the Directors may not amend
these Articles of Incorporation.
(iii) An amendment to these Articles of Incorporation shall become
effective as provided in Section 10.5.
(iv) These Articles of Incorporation may not be amended except as provided
in this Section 8.1.
8.2 Reorganization.
Subject to the provisions of any class or series of Shares at the time
outstanding, the Directors shall have the power (i) to cause the organization
of a corporation, association, trust or other organization to take over the
Company Property and to carry on the affairs of the Company, or (ii) merge the
Company into, or sell, convey and transfer the Company Property to any such
corporation, association, trust or organization in exchange for Securities
thereof or beneficial interests therein, and the assumption by the transferee
of the liabilities of the Company, and upon the occurrence of (i) or (ii)
above terminate the Company and deliver such Securities or beneficial
interests ratably among the Stockholders according to the respective rights of
the class or series of Shares held by them; provided, however, that any such
action shall have been approved, at a meeting of the Stockholders called for
that purpose, by the affirmative vote of the holders of not less than a
majority of the Shares then outstanding and entitled to vote thereon.
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8.3 Merger, Consolidation or Sale of Company Property.
Subject to the provisions of any class or series of Shares at the time
outstanding, the Directors shall have the power to (i) merge the Company into
another entity, (ii) consolidate the Company with one (1) or more other
entities into a new entity; (iii) sell or otherwise dispose of all or
substantially all of the Company Property; or (iv) dissolve or liquidate the
Company; provided, however, that such action shall have been approved, at a
meeting of the Stockholders called for that purpose, by the affirmative vote of
the holders of not less than a majority of the Shares then outstanding and
entitled to vote thereon. Any such transaction involving an Affiliate of the
Company also must be approved by a majority of the Directors not otherwise
interested in such transaction as fair and reasonable to the Company and on
terms and conditions not less favorable to the Company than those available
from unaffiliated third parties.
In connection with any proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all
Properties shall be obtained from a competent independent appraiser. The
Properties shall be appraised on a consistent basis, and the appraisal shall be
based on the evaluation of all relevant information and shall indicate the
value of the Properties as of a date immediately prior to the announcement of
the proposed Roll-Up Transaction. The appraisal shall assume an orderly
liquidation of Properties over a 12-month period. The terms of the engagement
of the independent appraiser shall clearly state that the engagement is for the
benefit of the Company and the Stockholders. A summary of the appraisal,
indicating all material assumptions underlying the appraisal, shall be included
in a report to Stockholders in connection with a proposed Roll-Up Transaction.
In connection with a proposed Roll-Up Transaction which has not been approved
by vote of at least two-thirds (2/3) of the Stockholders, the person sponsoring
the Roll-Up Transaction shall offer to Stockholders who vote against the
proposed Roll-Up Transaction the choice of:
(i) accepting the securities of a Roll-Up Entity offered in the proposed
Roll-Up Transaction; or
(ii) one of the following:
(a) remaining Stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(b) receiving cash in an amount equal to the Stockholder's pro rata
share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(iii) which would result in the Stockholders having democracy rights in
a Roll-Up Entity that are less than the rights provided for in Sections
6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 7.1 of these Articles of Incorporation;
(iv) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the minimum
extent necessary to pre serve the tax status of the Roll-Up Entity), or
which would limit the ability of an investor to exercise the voting rights
of its Securities of the Roll-Up Entity on the basis of the number of
Shares held by that investor;
(v) in which investor's rights to access of records of the Roll-Up
Entity will be less than those described in Sections 6.4 and 6.5 hereof; or
(vi) in which any of the costs of the Roll-Up Transaction would be borne
by the Company if the Roll-Up Transaction is not approved by the
Stockholders.
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ARTICLE IX:
DURATION OF COMPANY
9.1 Perpetual Existence.
The duration of the Company is perpetual.
ARTICLE X:
MISCELLANEOUS
10.1 Governing Law.
These Articles of Incorporation have been approved by the Directors
executing the Articles of Amendment in which they are included and delivered in
the State of Maryland with reference to the laws thereof, and the rights of all
parties and the validity, construction and effect of every provision hereof
shall be subject to and construed according to the laws of the State of
Maryland without regard to conflicts of laws provisions thereof.
10.2 Reliance by Third Parties.
Any certificate shall be final and conclusive as to any Persons dealing with
the Company if executed by an individual who, according to the records of the
Company or of any recording office in which these Articles of Incorporation may
be recorded, appears to be the Secretary or an Assistant Secretary of the
Company or a Director, and if certifying to: (i) the number or identity of
Directors, officers of the Company or Stockholders; (ii) the due authorization
of the execution of any document; (iii) the action or vote taken, and the
existence of a quorum, at a meeting of the Directors or Stockholders; (iv) a
copy of the Articles of Incorporation or of the Bylaws as a true and complete
copy as then in force; (v) an amendment to these Articles of Incorporation;
(vi) the dissolution of the Company; or (vii) the existence of any fact or
facts which relate to the affairs of the Company. No purchaser, lender,
transfer agent or other Person shall be bound to make any inquiry concerning
the validity of any transaction purporting to be made on behalf of the Company
by the Directors or by any duly authorized officer, employee or agent of the
Company.
10.3 Provisions in Conflict with Law or Regulations.
(i) The provisions of these Articles of Incorporation are severable, and if
the Directors shall determine that any one or more of such provisions are in
conflict with the REIT Provisions of the Code, or other applicable federal or
state laws, the conflicting provisions shall be deemed never to have
constituted a part of these Articles of Incorporation, even without any
amendment of these Articles of Incorporation pursuant to Section 8.1 hereof;
provided, however, that such determination by the Directors shall not affect or
impair any of the remaining provisions of these Articles of Incorporation or
render invalid or improper any action taken or omitted prior to such
determination. No Director shall be liable for making or failing to make such a
determination.
(ii) If any provision of these Articles of Incorporation shall be held
invalid or unenforceable in any jurisdiction, such holding shall not in any
manner affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of these Articles of Incorporation in any
jurisdiction.
10.4 Construction.
In these Articles of Incorporation, unless the context otherwise requires,
words used in the singular or in the plural include both the plural and
singular and words denoting any gender include both genders. The title and
headings of different parts are inserted for convenience and shall not affect
the meaning, construction or effect of these Articles of Incorporation. In
defining or interpreting the powers and duties of the Company and
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<PAGE>
its Directors and officers, reference may be made, to the extent appropriate,
to the Code and to Titles 1 through 3 of the Corporations and Associations
Article of the Annotated Code of Maryland, referred to herein as the "MGCL."
10.5 Recordation.
These Articles of Incorporation and any amendment hereto shall be filed for
record with the State Department of Assessments and Taxation of Maryland and
may also be filed or recorded in such other places as the Directors deem
appropriate, but failure to file for record these Articles of Incorporation or
any amendment hereto in any office other than in the State of Maryland shall
not affect or impair the validity or effectiveness of these Articles of
Incorporation or any amendment hereto. A restated Articles of Incorporation
shall, upon filing, be conclusive evidence of all amendments contained therein
and may thereafter be referred to in lieu of the original Articles of
Incorporation and the various amendments thereto.
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<PAGE>
Exhibit B
APF's Restated Articles (marked to show changes from Existing Articles)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECOND AMENDED AND RESTATED
_______
ARTICLES OF INCORPORATION
OF
CNL RESTAURANT AMERICAN PROPERTIES FUND, INC.
------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article I: THE COMPANY; DEFINITIONS....................................... B-1
1.1Name................................................................. B-1
1.2Resident Agent....................................................... B-1
1.3Nature of Company.................................................... B-1
1.4Purposes............................................................. B-1
1.5Definitions.......................................................... B-1
Article II: BOARD OF DIRECTORS............................................ B-7
2.1Number............................................................... B-7
2.2Committees........................................................... B-8
2.3Initial Board; Term.................................................. B-8
2.4Fiduciary Obligations................................................ B-8
2.5Resignation, Removal or Death........................................ B-8
2.6Business Combination Statute......................................... B-8
2.7Control Share Acquisition Statute.................................... B-9
Article III: POWERS OF DIRECTORS.......................................... B-9
3.1General.............................................................. B-9
3.2Specific Powers and Authority........................................ B-9
3.3Determination of Best Interest of Company............................ B-13
Article IV: INVESTMENT OBJECTIVES AND OPERATING RESTRICTIONS.............. B-17
4.1Investment Objectives................................................ B-17
4.2Operating Restrictions............................................... B-18
Article V: SHARES......................................................... B-22
5.1Authorized Shares.................................................... B-22
5.2Common Shares........................................................ B-22
5.3Preferred Shares..................................................... B-23
5.4General Nature of Shares............................................. B-24
5.5Restrictions On Ownership and Transfer............................... B-24
5.6Excess Shares........................................................ B-30
5.7Settlements.......................................................... B-33
5.8Severability......................................................... B-33
5.9Waiver............................................................... B-33
Article VI: STOCKHOLDERS.................................................. B-34
6.1Meetings of Stockholders............................................. B-34
6.2Voting Rights of Stockholders........................................ B-34
6.3Stockholder Action to be Taken by Meeting............................ B-34
6.4Right of Inspection.................................................. B-34
6.5Access to Stockholder List........................................... B-35
6.6Reports.............................................................. B-35
Article VII: LIABILITY; TRANSACTIONS BETWEEN AFFILIATES AND THE COMPANY... B-36
7.1Limitation of Stockholder Liability.................................. B-36
7.2Exculpation.......................................................... B-36
7.3Indemnification...................................................... B-36
7.4Express Exculpatory Clauses In Instruments........................... B-37
7.5Transactions with Affiliates......................................... B-38
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
ARTICLE VIII: AMENDMENT; REORGANIZATION; MERGER, ETC....................... B-38
8.1Amendment............................................................. B-38
8.2Reorganization........................................................ B-39
8.3Merger, Consolidation or Sale of Company Property..................... B-39
ARTICLE IX: DURATION OF COMPANY............................................ B-40
9.1Perpetual Existence................................................... B-40
ARTICLE X: MISCELLANEOUS................................................... B-40
10.1Governing Law........................................................ B-40
10.2Reliance by Third Parties............................................ B-40
10.3Provisions in Conflict with Law or Regulations....................... B-41
10.4Construction......................................................... B-41
10.5Recordation.......................................................... B-41
</TABLE>
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<PAGE>
ARTICLE I: ARTICLE I:
THE COMPANY; DEFINITIONS
Section 2.1 1.1 Name.
The name of the corporation (the "Company") is:
CNL Restaurant American Properties Fund, Inc.
So far as may be practicable, the business of the Company shall be conducted
and transacted under that name, which name, (and the word "Company" wherever
used in these Second Amended and Restated Articles of Incorporation Amendment
and Restatement of CNL American Restaurant Properties Fund, Inc. (these
"Articles of Incorporation"), except where the context otherwise requires,)
shall refer to the Directors collectively but not individually or personally
and shall not refer to the Stockholders or to any officers, employees or agents
of the Company or of such Directors.
Under circumstances in which the Directors determine that the use of the
name "CNL American Restaurant Properties Fund, Inc." is not practicable, they
may use any other designation or name for the Company.
Section 1.2 1.2 Resident Agent.
The name and address of the resident agent for service of process of the
Company in the State of Maryland shall be is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202. The Company may have
such principal office within the State of Maryland as the Directors may from
time to time determine. The Company may also have such other offices or places
of business within or without the State of Maryland as the Directors may from
time to time determine.
Section 1.3 1.3 Nature of Company.
The Company is a Maryland corporation within the meaning of the MGCL.
Section 1.4 1.4 Purposes.
The purposes for which the Company is formed are to conduct any business for
which corporations may be organized under the laws of the State of Maryland
including, but not limited to, the following: (i) to acquire, hold, own,
develop, construct, improve, maintain, operate, sell, lease, transfer,
encumber, convey, exchange and otherwise dispose of or deal with real and
personal property; (ii) to engage in the business of offering furniture,
fixture, and equipment financing to operators of Restaurant Chains; and (iii)
to enter into any partnership, joint venture or other similar arrangement to
engage in any of the foregoing.
1.1 1.5 Definitions.
As used in these Articles of Incorporation, the following terms shall have
the following meanings unless the context otherwise requires (certain other
terms used in Article V ARTICLE VII hereof are defined in Sections 5.2, 5.3,
5.5 and 5.6 7.2, 7.3, 7.6, and 7.7 hereof):
"Acquisition Expenses" shall mean any and all expenses incurred by the
Company, the Advisor, or any Affiliate of either in connection with the
selection or acquisition of any Property, whether or not acquired, including,
without limitation, legal fees and expenses, travel and communications
expenses, costs of appraisals, nonrefundable option payments on property not
acquired, accounting fees and expenses, and title insurance.
"Acquisition Fee" shall mean any and all fees and commissions, exclusive of
Acquisition Expenses, paid by any Person or entity to any other Person or
entity (including any fees or commissions paid by or to any Affiliate of the
Company or the Advisor) in connection with making or investing in mortgage
loans and the selection or acquisition of any Property, including, without
limitation, real estate commissions, acquisition fees, finder's fees, selection
fees, nonrecurring management fees, consulting fees, loan fees, points, or any
other fees or commissions of a similar nature.
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<PAGE>
"Advisor" or "Advisors" means the Person or Persons, if any, appointed,
employed or contracted with by the Company pursuant to Section 4.1 hereof and
responsible for directing or performing the day-to-day business affairs of the
Company, including any Person to whom the Advisor subcontracts substantially
all of such functions.
"Affiliate" or "Affiliated" means, as to any individual, corporation,
partnership, trust or other association (other than the Excess Shares Trust),
(i) any Person or entity directly or indirectly,; through one or more
intermediaries controlling, controlled by, or under common control with another
person or entity; (ii) any Person or entity, directly or indirectly owning or
controlling ten percent (10%) or more of the outstanding voting securities of
another Person or entity; (iii) any officer, director, partner or trustee of
such Person or entity; (iv) any Person ten percent (10%) or more of whose
outstanding voting securities are directly or indirectly owned, controlled, or
held, with power to vote, by such other Person; and (v) if such other Person or
entity is an officer, director, partner, or trustee of a Person or entity, the
Person or entity for which such Person or entity acts in any such capacity.
"Asset Management Fee" shall mean the fee payable to the Advisor for
specified day-to-day professional management services in connection with the
Company and its Properties pursuant to the Advisory Agreement.
"Average Invested Assets" shall mean, for a specified period, the average of
the aggregate book value of the assets of the Company invested, directly or
indirectly, in Properties and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, computed by
taking the average of such values at the end of each month during such period.
"Bylaws" means the bylaws of the Company, as the same are in effect from
time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute thereto. Reference to any provision of the Code
shall mean such provision as in effect from time to time, as the same may be
amended, and any successor provision thereto, as interpreted by any applicable
regulations as in effect from time to time.
"Company Property" means any and all property, real, personal or otherwise,
tangible or intangible, including without limitation mortgage loans, interests
in trust certificates and Secured Equipment Leases, which is transferred or
conveyed to the Company (including all rents, income, profits and gains
therefrom), which is owned or held by, or for the account of, the Company.
"Competitive Real Estate Commission" means a real estate or brokerage
commission for the purchase or sale of property which is reasonable, customary,
and competitive in light of the size, type, and location of the property. The
total of all real estate commissions paid by the Company to all Persons
(including the subordinated real estate disposition fee payable to the Advisor)
in connection with any Sale of one or more of the Company's Properties shall
not exceed the lesser of (i) a Competitive Real Estate Commission or (ii) six
percent (6%) of the gross sales price of the Property or Properties.
"Directors," "Board of Directors" or "Board" means, collectively, the
individuals named in Section 2.32.4 of these Articles of Incorporation so long
as they continue in office and all other individuals who have been duly elected
and qualify as Directors of the Company hereunder.
"Distributions" means any distributions of money or securities by the
Company to owners of Shares, including distributions that may constitute a
return of capital for federal income tax purposes. The Company will make no
distributions other than distributions of money or securities.
"Equipment" shall mean the furniture, fixtures and equipment used at
Restaurant Facilities.
"Equity Shares" means transferable shares of beneficial interest of the
Company of any class or series, including Common Shares or Preferred Shares.
"Gross Proceeds" means the aggregate purchase price of all Shares sold for
the account of the Company through the offering, without deduction for selling
commissions, volume discounts, the marketing support and
B-2
<PAGE>
due diligence expense reimbursement fee or Organization and Offering Expenses.
For the purpose of computing Gross Proceeds, the purchase price of any Share
for which reduced Selling Commissions are paid to the Managing Dealer or a
Soliciting Dealer (where net proceeds to the Company are not reduced) shall be
deemed to be $10.00.
"Independent Director" means a Director who is not, and within the last two
(2) years has not been, directly or indirectly associated with the Advisor by
virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii)
employment by the Advisor or its Affiliates, (iii) service as an officer or
director of the Advisor or its Affiliates, (iv) performance of services, other
than as a Director, for the Company, (v) service as a director or trustee of
more than three (3) real estate investment trusts advised by the Advisor, or
(vi) maintenance of a material business or professional relationship with the
Advisor or any of its Affiliates. A business or professional relationship is
considered material if the gross revenue derived by the Director from the
Advisor and Affiliates exceeds five percent (5%) of either the Director's
annual gross revenue during either of the last two (2) years or the Director's
net worth on a fair market value basis. An indirect relationship shall include
circumstances in which a Director's spouse, parents, children, siblings,
mothers- or fathers-in-law, sons- or daughters-in-law or brothers- or sisters-
in-law is or has been associated with the Advisor, any of its Affiliates or
the Company.
"Independent Expert" means a person or entity with no material current or
prior business or personal relationship with the Advisor or the Directors and
who is engaged to a substantial extent in the business of rendering opinions
regarding the value of assets of the type held by the Company.
"Initial Public Offering" means the offering and sale of Common Shares of
the Company pursuant to the Company's first effective registration statement
covering such Common Shares filed under the Securities Act of 1933, as
amended.
"Invested Capital" means the amount calculated by multiplying the total
number of Shares purchased by Stockholders by the issue price, reduced by the
portion of any Distribution that is attributable to Net Sales Proceeds and by
any amounts paid by the Company to repurchase Shares pursuant to the Company's
share redemption plan.
"Joint Ventures" means those joint venture or general partnership
arrangements in which the Company is a co-venturer or general partner which
are established to acquire Properties.
"Leverage" means the aggregate amount of indebtedness of the Company for
money borrowed (including purchase money mortgage loans) outstanding at any
time, both secured and unsecured.
"Listing" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
"Loan" means a loan, the maximum principal amount of which shall not exceed
10% of Gross Proceeds.
"Managing Dealer" means CNL Securities Corp., an Affiliate of the Advisor,
or such other person or entity selected by the Board of Directors to act as
the managing dealer for the offering. CNL Securities Corp. is a member of the
National Association of Securities Dealers, Inc.
"MGCL" means the Maryland General Corporation Law as contained in the
Corporations and Associations Article of the Annotated Code of Maryland.
"Mortgages" means mortgages, deeds of trust or other security interests on
or applicable to Real Property.
"NASAA REIT Guidelines" means the guidelines for Real Estate Investment
Trusts published by the North American Securities Administrators Association.
B-3
<PAGE>
"Net Assets" means the total assets of the Company (other than intangibles),
at cost, before deducting depreciation or other non-cash reserves, less total
liabilities, calculated quarterly by the Company on a basis consistently
applied.
"Net Income" shall mean for any period, the total revenues applicable to
such period, less the total expenses applicable to such period excluding
additions to reserves for depreciation, bad debts or other similar non-cash
reserves; provided, however, Net Income for purposes of calculating total
allowable Operating Expenses shall exclude the gain from the sale of the
Company's assets.
"Net Sales Proceeds" means in the case of a transaction described in clause
(i)(A) of the definition of Sale, the proceeds of any such transaction less the
amount of all real estate commissions and closing costs paid by the Company. In
the case of a transaction described in clause (i)(B) of such definition, Net
Sales Proceeds means the proceeds of any such transaction less the amount of
any legal and other selling expenses incurred in connection with such
transaction. In the case of a transaction described in clause (i)(C) of such
definition, Net Sales Proceeds means the proceeds of any such transaction
actually distributed to the Company from the Joint Venture. In the case of a
transaction or series of transactions described in clause (i)(D) of the
Definition of Sale, Net Sales Proceeds means the proceeds of any such
transaction less the amount of all commissions and closing costs paid by the
Company. In the case of a transaction described in clause (ii) of the
definition of Sale, Net Sales Proceeds means the proceeds of such transaction
or series of transactions less all amounts generated thereby and reinvested in
one or more Properties within one hundred eighty (180) days thereafter and less
the amount of any real estate commissions, closing costs, and legal and other
selling expenses incurred by or allocated to the Company in connection with
such transaction or series of transactions. Net Sales Proceeds shall also
include, in the case of any Property consisting of a building only, any amounts
that the Company determines, in its discretion, to be economically equivalent
to the proceeds of a Sale. Net Sales Proceeds shall not include any reserves
established by the Company in its sole discretion.
"Operating Expenses" shall include all costs and expenses incurred by the
Company, as determined under generally accepted accounting principles, which in
any way are related to the operation of the Company or to Company business,
including (a) advisory fees, (b) the Soliciting Dealer Servicing Fee, (c) the
Asset Management Fee, (d) the Performance Fee, and (e) the Subordinated
Incentive Fee, but excluding (i) the expenses of raising capital such as
Organizational and Offering Expenses, legal, audit, accounting, underwriting,
brokerage, listing, registration, and other fees, printing and other such
expenses and tax incurred in connection with the issuance, distribution,
transfer, registration and Listing of the Shares, (ii) interest payments, (iii)
taxes, (iv) non-cash expenditures such as depreciation, amortization and bad
debt reserves, (v) the Advisor's subordinated ten percent (10%) share of Net
Sales Proceeds, (vi) the Secured Equipment Lease Servicing Fee, and (vii)
Acquisition Fees and Acquisition Expenses, real estate commissions on the
resale of property, and other expenses connected with the acquisition and
ownership of real estate interests, mortgage loans, or other property (such as
the costs of foreclosure, insurance premiums, legal services, maintenance,
repair, and improvement of property).
"Organizational and Offering Expenses" means any and all costs and expenses,
other than Selling Commissions, the 0.5% marketing support and due diligence
expense reimbursement fee, and the Soliciting Dealer Servicing Fee incurred by
the Company, the Advisor or any Affiliate of either in connection with the
formation, qualification and registration of the Company and the marketing and
distribution of Shares, including, without limitation, the following: legal,
accounting and escrow fees; printing, amending, supplementing, mailing and
distributing costs; filing, registration and qualification fees and taxes;
telegraph and telephone costs; and all advertising and marketing expenses,
including the costs related to investor and broker-dealer sales meetings. The
Organizational and Offering Expenses paid by the Company in connection with
formation of the Company, together with all Selling Commissions, the 0.5%
marketing support and due diligence reimbursement fee, and the Soliciting
Dealer Servicing Fee incurred by the Company, will not exceed fifteen percent
(15%) of the proceeds raised in connection with such offering.
"Performance Fee" means the fee payable to the Advisor under certain
circumstances if certain performance standards have been met and the
Subordinated Incentive Fee has not been paid.
B-4
<PAGE>
"Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company or other entity, or any government or any agency or political
subdivision thereof, and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, but does not include (i) an underwriter that participates in a public
offering of Equity Shares for a period of sixty (60) days following the initial
purchase by such underwriter of such Equity Shares in such public offering,
provided that the foregoing exclusions shall apply only if the ownership of
such Equity Shares by an underwriter would not cause the Company to fail to
qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(a) of the Code or otherwise cause the Company to fail to qualify as
a REIT.
"Property" or "Properties" means (i) the real properties, including the
buildings located thereon, (ii) the real properties only, or (iii) the
buildings only, which are acquired by the Company, either directly or through
joint venture arrangements or other partnerships or similar arrangements.
"Prospectus" means the same as that term is defined in Section 2(10) of the
Securities Act of 1933, including a preliminary prospectus, an offering
circular as described in Rule 256 of the General Rules and Regulations under
the Securities Act of 1933 or, in the case of an intrastate offering, any
document by whatever name known, utilized for the purpose of offering and
selling securities to the public.
--------
"Real Estate Asset Value" shall mean the amount actually paid or allocated
to the purchase, development, construction or improvement of a Property,
exclusive of Acquisition Fees and Acquisition Expenses.
-----------------
"Real Property" or "Real Estate" means land, rights in land (including
leasehold interests), and any buildings, structures, improvements, furnishings,
fixtures and equipment located on or used in connection with land and rights or
interests in land.
"REIT" means a "real estate investment trust" as defined pursuant to
Sections 856 through 860 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code and
any successor or other provisions of the Code relating to real estate
investment trusts (including provisions as to the attribution of ownership of
beneficial interests therein) and the regulations promulgated thereunder.
"Restaurant Chains" shall mean the national and regional restaurant chains,
primarily fast-food, family-style, and casual dining chains, to be selected by
the Advisor, who themselves or through their franchisees will either (i) lease
the Properties purchased by the Company or (ii) become lessees of Secured
Equipment Leases.
"Roll-Up Entity" shall mean a partnership, real estate investment trust,
corporation, trust or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" shall mean a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities of the Company that have been listed on
a national securities exchange or included for quotation on the National Market
System of the National Association of Securities Dealers Automated Quotation
System for at least 12 months; or (ii) a transaction involving the conversion
to corporate, trust, or association form of only the Company if, as a
consequence of the transaction, there will be no significant adverse change in
Stockholder voting rights, the term of existence of the Company, compensation
to the Advisor or the investment objectives of the Company.
"Sale" or "Sales" (i) means any transaction or series of transactions
whereby: (A) the Company sells, grants, transfers, conveys, or relinquishes its
ownership of any Property or portion thereof, including the lease of any
Property consisting of the building only, and including any event with respect
to any Property which
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<PAGE>
gives rise to a significant amount of insurance proceeds or condemnation
awards; (B) the Company sells, grants, transfers, conveys, or relinquishes its
ownership of all or substantially all of the interest of the Company in any
Joint Venture in which it is a co-venturer or partner; (C) any Joint Venture in
which the Company as a co-venturer or partner sells, grants, transfers,
conveys, or relinquishes its ownership of any Property or portion thereof,
including any event with respect to any Property which gives rise to insurance
claims or condemnation awards; or (D) the Company sells, grants, conveys, or
relinquishes its interest in any Secured Equipment Lease or portion thereof,
including any event with respect to any Secured Equipment Lease which gives
rise to a significant amount of insurance proceeds or similar awards, but (ii)
shall not include any transaction or series of transactions specified in clause
(i)(A), (i)(B), or (i)(C) above in which the proceeds of such transaction or
series of transactions are reinvested in one or more Properties or Secured
Equipment Leases within one hundred eighty (180) days thereafter.
"Secured Equipment Leases" means the furniture, fixtures and equipment
financing made available by the Company. to operators of Restaurant Chains
pursuant to which the Company will finance, through direct financing leases,
the Equipment.
"Secured Equipment Lease Servicing Fee" means the fee payable to the Advisor
by the Company out of the proceeds of the Loan for negotiating Secured
Equipment Leases and supervising the Secured Equipment Lease equal to 2% of the
purchase price of the Equipment subject to each Secured Equipment Lease and
paid upon entering into such lease.
----------------------------
"Securities" means Equity Shares, Excess Shares, any other stock, shares or
other evidences of equity or beneficial or other interests, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in, temporary or interim certificates for, receipts
for, guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire, any of the foregoing.
"Selling Commissions" shall mean any and all commissions payable to
underwriters, managing dealers, or other broker-dealers in connection with the
sale of Shares, including, without limitation, commissions payable to CNL
Securities Corp.
"Shares" means shares of beneficial interest of the Company of any class or
series, including Common Shares, Preferred Shares and Excess Shares. up to
16,500,000 Shares of common stock of the Company to be sold in the Initial
Public Offering.
"Soliciting Dealers" means those broker-dealers that are members of the
National Association of Securities Dealers, Inc., or that are exempt from
broker-dealer registration, and that, in either case, enter into participating
broker or other agreements with the Managing Dealer to sell Shares.
------------
"Soliciting Dealer Servicing Fee" means an annual fee of .20% of Invested
Capital on December 31 of each year following the year in which the offering of
the Shares terminates, payable to the Managing Dealer, which in turn may
reallow all or a portion of such fee to the Soliciting Dealers whose clients
hold Shares on such date.
----------------------
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Company or any Person who will control,
manage or participate in the management of the Company, and any Affiliate of
such Person. Not included is any Person whose only relationship with the
Company is that of an independent property manager of Company assets, and whose
only compensation is as such. Sponsor does not include wholly independent third
parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services. A Person may also be deemed a
Sponsor of the Company by:
-----
a.taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the Company, either alone or in
conjunction with one or more other Persons;
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b.receiving a material participation in the Company in connection with
the founding or organizing of the business of the Company, in consideration
of services or property, or both services and property;
c.having a substantial number of relationships and contacts with the
Company,
d.possessing significant rights to control Company properties;
e.receiving fees for providing services to the Company which are paid on
a basis that is not customary in the industry; or
f. providing goods or services to the Company on a basis which was not
negotiated at arms length with the Company.
"Stock Option Plan" means a plan that provides for the matters set forth in
Rule 260.140.41 of Section 25140 of the Corporations Code of California, as in
effect as of the date of these Articles of Incorporation.
------------
"Stockholders' 7% Return," as of each date, means an aggregate amount equal
to a seven percent (7%) cumulative, noncompounded, annual return on Invested
Capital.
-----------------
"Stockholders" means the registered holders of the Company's Equity Shares.
"Subordinated Incentive Fee" means the fee payable to the Advisor under
certain circumstances if the Shares are listed on a national securities
exchange or over-the-counter market.
-------------------
"Successor" means any successor in interest of the Company.
------
"Termination Date" means the date of termination of the Advisory Agreement.
------------
"Unimproved Real Property" means Property in which the Company has an equity
interest that is not acquired for the purpose of producing rental or other
operating income, that has no development or construction in process and for
which no development or construction is planned, in good faith, to commence
within one year.
-------------------
ARTICLE II: ARTICLE II:
BOARD OF DIRECTORS
Section 2.1 2.1 Number.
The number of Directors initially shall be five (5), which number may be
increased or decreased from time to time by resolution of the Directors then in
office or by a majority vote of the Stockholders entitled to vote: provided,
however, that the total number of Directors shall be not fewer than three (3)
and not more than fifteen (15), subject to the Bylaws and to any express rights
of any holders of any series of Preferred Shares to elect additional directors
under specified circumstances. A majority of the Board of Directors will be
Independent Directors. Independent Directors shall nominate replacements for
vacancies among the Independent Directors. No reduction in the number of
Directors shall cause the removal of any Director from office prior to the
expiration of his term. Any vacancy created by an increase in the number of
Directors will be filled, at any regular meeting or at any special meeting of
the Directors called for that purpose, by a majority of the Directors. Any
other vacancy will be filled at any annual meeting or at any special meeting of
the Stockholders called for that purpose, by a majority of the Common Shares
outstanding and entitled to vote. For the purposes of voting for directors,
each Share of stock may be voted for as many individuals as there are directors
to be elected and for whose election the Share is entitled to be voted, or as
may otherwise be required by the MGCL or other applicable law as in effect from
time to time.
Section 2.2 Experience.
A Director shall have had at least three (3) years of relevant experience
demonstrating the knowledge and experience required to successfully acquire and
manage the type of assets being acquired by the Company. At least one of the
Independent Directors shall have three (3) years of relevant real estate
experience.
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Section 2.3 2.2 Committees
Subject to the MGCL, the Directors may establish such committees as they
deem appropriate, in their discretion., provided that the majority of the
members of each committee are Independent Directors.
Section 2.4 2.3 Initial Board; Term.
The initial Directors are James M. Seneff, Jr., Robert A. Bourne, G. Richard
Hostetter, J. Joseph Kruse and Richard C. Huseman. Each Director shall hold
office for one (1) year, until the next annual meeting of Stockholders and
until his successor shall have been duly elected and shall have qualified.
Directors may be elected to an unlimited number of successive terms.
The names and address of the initial Directors are as follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
James M. Seneff, Jr................................... 400 E. South Street
Orlando, Florida 32801
Robert A. Bourne...................................... 400 E. South Street
Orlando, Florida 32801
G. Richard Hostetter.................................. 400 E. South Street
Orlando, Florida 32801
J. Joseph Kruse....................................... 400 E. South Street
Orlando, Florida 32801
Richard C. Huseman.................................... 400 E. South Street
Orlando, Florida 32801
</TABLE>
Section 2.5 2.4 Fiduciary Obligations.
The Directors serve in a fiduciary capacity to the Company and have a
fiduciary duty to the Stockholders of the Company. , including a specific
fiduciary duty to supervise the relationship of the Company with the Advisor.
Section 2.6 Approval by Independent Directors.
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A majority of Independent Directors must approve all matters to which
Sections 2.1, 3.2(vii) and (xii), 3.3, 4.1, 4.2, 4.6, 4.7, 4.8, 4.10, 4.13,
5.2, 5.4(xiii) and (xiv), 6.3, 6.4, 8.1, 8.2, 9.2 and 9.4 herein apply.
Section 2.7 2.5 Resignation, Removal or Death.
Any Director may resign by written notice to the Board of Directors,
effective upon execution and delivery to the Company of such written notice or
upon any future date specified in the notice. A Director may be removed from
office with or without cause only at a meeting of the Stockholders called for
that purpose, by the affirmative vote of the holders of not less than a
majority of the Common Shares then outstanding and entitled to vote in the
election of the Directors, subject to the rights of any Preferred Shares to
vote for such 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
should be removed. Upon the resignation or removal of any Director, or his
otherwise ceasing to be a Director, he shall automatically cease to have any
such right, title or interest in and to the Company Property and shall execute
and deliver such documents as the remaining Directors require for the
conveyance of any Company Property held in his name, and shall account to the
remaining Directors as they require for all property which he holds as
Director. Upon the incapacity or death of any Director, his legal
representative shall perform the acts described in the foregoing sentence.
Section 2.8 2.6 Business Combination Statute.
Notwithstanding any other provision of these Articles of Incorporation or
any contrary provision of law, the Maryland Business Combination Statute, found
in Title 3, subtitle 6 of the MGCL, as amended from time
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to time, or any successor statute thereto, shall not apply to any "business
combination" (as defined in Section 3-601(e) of the MGCL, as amended from time
to time, or any successor statute thereto) of the Company and any Person.
Section 2.9 2.7 Control Share Acquisition Statute.
Notwithstanding any other provision of these Articles of Incorporation or
any contrary provision of law, the Maryland Control Share Acquisition Statute,
found in Title 3, subtitle 7 of the MGCL, as amended from time to time, or any
successor statute thereto shall not apply to any acquisition of Securities of
the Company by any Person.
ARTICLE III: ARTICLE III:
POWERS OF DIRECTORS
Section 3.1 3.1 General.
Subject to the express limitations herein or in the Bylaws and to the
general standard of care required of directors under the MGCL and other
applicable law, (i) the business and affairs of the Company shall be managed
under the direction of the Board of Directors and (ii) the Directors shall have
full, exclusive and absolute power, control and authority over the Company
Property and over the business of the Company as if they, in their own right,
were the sole owners thereof, except as otherwise limited by these Articles of
Incorporation. The Directors have established the written policies on
investments and borrowing set forth in Article IV this Article III and Article
V hereof and shall monitor the administrative procedures, investment
operations, Secured Equipment Lease program and performance of the Company and
the Advisor to assure that such policies are carried out. The Directors may
take any actions that, in their sole judgment and discretion, are necessary or
desirable to conduct the business of the Company. A majority of the Board of
Directors, including a majority of Independent Directors, has approved hereby
ratify these Articles of Incorporation, which shall be construed with a
presumption in favor of the grant of power and authority to the Directors. Any
construction of these Articles of Incorporation or determination made in good
faith by the Directors concerning their powers and authority hereunder shall be
conclusive. The enumeration and definition of particular powers of the
Directors included in this Article III shall in no way be limited or restricted
by reference to or inference from the terms of this or any other provision of
these Articles of Incorporation or construed or deemed by inference or
otherwise in any manner to exclude or limit the powers conferred upon the
Directors under the general laws of the State of Maryland as now or hereafter
in force.
Section 3.2 Specific Powers and Authority.
Subject only to the express limitations herein, and in addition to all other
powers and authority conferred by these Articles of Incorporation or by law,
the Directors, without any vote, action or consent by the Stockholders, shall
have and may exercise, at any time or times, in the name of the Company or on
its behalf the following powers and authorities:
(i) Investments. Subject to Article IV and Section 7.5 Article V and Section
9.5 hereof, to invest in, purchase or otherwise acquire and to hold real,
personal or mixed, tangible or intangible, property of any kind wherever
located, or rights or interests therein or in connection therewith, all
without regard to whether such property, interests or rights are
authorized by law for the investment of funds held by trustees or other
fiduciaries, or whether obligations the Company acquires have a term
greater or lesser than the term of office of the Directors, or the
possible termination of the Company, for such consideration as the
Directors may deem proper (including cash, property of any kind or
Securities of the Company); provided, however, that the Directors shall
take such actions as they deem necessary and desirable to comply with any
requirements of the MGCL relating to the types of assets held by
the Company.
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(ii) REIT Qualification. The Board of Directors shall use its best efforts to
cause the Company and its Stockholders to qualify for U.S. federal income
tax treatment in accordance with the provisions of the Code applicable to
REITs (as those terms are defined in Section 1.5 hereof). In furtherance
of the foregoing, the Board of Directors shall use its best efforts to
take such actions as are necessary, and may take such actions as it deems
desirable (in its sole discretion) to preserve the status of the Company
as a REIT; provided, however, that in the event that the Board of
Directors determines, by vote of at least two-thirds (2/3) of the
Directors, that it no longer is in the best interests of the Company to
qualify as a REIT, the Board of Directors shall take such actions as are
required by the Code, the MGCL and other applicable law, to cause the
matter of termination of qualification as a REIT to be submitted to a vote
of the Stockholders of the Company pursuant to Section 6.2. 8.2.
(iii) Sale, Disposition and Use of Property. Subject to Article IV Article V
and Sections 7.5 and 8.3 Sections 9.5 and 10.3 hereof, to sell, rent,
lease, hire, exchange, release, partition, assign, mortgage, grant
security interests in, encumber, negotiate, dedicate, grant easements in
and options with respect to, convey, transfer (including transfers to
entities wholly or partially owned by the Company or the Directors) or
otherwise dispose of any or all of the Company Property by deeds
(including deeds in lieu of foreclosure with or without consideration),
trust deeds, assignments, bills of sale, transfers, leases, mortgages,
financing statements, security agreements and other instruments for any
of such purposes executed and delivered for and on behalf of the Company
or the Directors by one or more of the Directors or by a duly authorized
officer, employee, agent or nominee of the Company, on such terms as they
deem appropriate; to give consents and make contracts relating to the
Company Property and its use or other property or matters; to develop,
improve, manage, use, alter or otherwise deal with the Company Property;
and to rent, lease or hire from others property of any kind; provided,
however, that the Company may not use or apply land for any purposes not
permitted by applicable law.
(iv) Financings. To borrow or, in any other manner, raise money for the
purposes and on the terms they determine, which terms may (i) include
evidencing the same by issuance of Securities of the Company and (ii) may
have such provisions as the Directors determine; to reacquire such
Securities of the Excess Shares Trust; to enter into other contracts or
obligations on behalf of the Excess Shares Trust; to guarantee, indemnify
or act as surety with respect to payment or performance of obligations of
any Person; to mortgage, pledge, assign, grant security interests in or
otherwise encumber the Company Property to secure any such Securities of
the Company, contracts or obligations (including guarantees,
indemnifications and suretyships); and to renew, modify, release,
compromise, extend, consolidate or cancel, in whole or in part, any
obligation to or of the Company or participate in any reorganization of
obligors to the Company. ; provided, however, that the Companys Leverage
may not exceed 300% of Net Assets.
(v) Lending. Subject to the provisions of Section 7.5 9.5 hereof, to lend
money or other Company Property on such terms, for such purposes and to
such Persons as they may determine.
(vi) Secured Equipment Leases. To engage in the business of offering furniture,
fixture, and equipment financing to the operators of Restaurant Chains,
provided, however, that the Company shall use its best efforts to ensure
that the total value of Secured Equipment Leases, in the aggregate will
not exceed 25% of the Company's total assets and that Secured Equipment
Leases to a single lessee, in the aggregate, will not exceed 5% of the
Company's total assets.
(vii) Issuance of Securities. Subject to the provisions of Article V Article
VII hereof, to create and authorize and direct the issuance (on either a
pro rata or a non-pro rata basis) by the Company, in shares, units or
amounts of one or more types, series or classes, of Securities of the
Company, which may have such voting rights, dividend or interest rates,
preferences, subordinations, conversion or redemption prices or rights;
maturity dates, distribution, exchange, or liquidation rights or other
rights as the Directors may determine, without vote of or other action by
the Stockholders, to such Persons for such consideration, at such time or
times and in such manner and on such terms as the Directors determine, to
list any of the Securities of the Company on any securities exchange; and
to purchase or otherwise acquire, hold, cancel, reissue, sell and
transfer any Securities of the Company.
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Notwithstanding the foregoing, the Organizational and Offering Expenses
paid in connection with the REITs formation or the syndication of its
Shares through the Initial Public Offering shall be reasonable and shall
in no event exceed an amount equal to fifteen percent (15%) of the
proceeds raised in the Initial Public Offering.
(viii) Expenses and Taxes. To pay any charges, expenses or liabilities
necessary or desirable, in the sole discretion of the Directors, for
carrying out the purposes of these Articles of Incorporation and
conducting business of the Company, including compensation or fees to
Directors, officers, employees and agents of the Company, and to
Persons contracting with the Company, and any taxes, levies, charges
and assessments of any kind imposed upon or chargeable against the
Company, the Company Property or the Directors in connection therewith;
and to prepare and file any tax returns, reports or other documents and
take any other appropriate action relating to the payment of any such
charges, expenses or liabilities.
(ix) Collection and Enforcement. To collect, sue for and receive money or
other property due to the Company; to consent to extensions of the time
for payment, or to the renewal, of any Securities or obligations; to
engage or to intervene in, prosecute, defend, compound, enforce,
compromise, release, abandon or adjust any actions, suits, proceedings,
disputes, claims, demands, security interests or things relating to the
Company, the Company Property or the Company's affairs; to exercise any
rights and enter into any agreements and take any other action necessary
or desirable in connection with the foregoing.
(x) Deposits. To deposit funds or Securities constituting part of the Company
Property in banks, trust companies, savings and loan associations,
financial institutions and other depositories, whether or not such
deposits will draw interest, subject to withdrawal on such terms and in
such manner as the Directors determine.
(xi) Allocation; Accounts. To determine whether moneys, profits or other
assets of the Company shall be charged or credited to, or allocated
between, income and capital, including whether or not to amortize any
premium or discount and to determine in what manner any expenses or
disbursements are to be borne as between income and capital (regardless
of how such items would normally or otherwise be charged to or allocated
between income and capital without such determination); to treat any
dividend or other distribution on any investment as, or apportion it
between, income and capital; in their discretion to provide reserves for
depreciation, amortization, obsolescence or other purposes in respect of
any Company Property in such amounts and by such methods as they
determine; to determine what constitutes net earnings, profits or
surplus; to determine the method or form in which the accounts and
records of the Company shall be maintained; and to allocate to the
Stockholders' equity account less than all of the consideration paid for
Securities and to allocate the balance to paid-in capital or capital
surplus.
(xii) Valuation of Property. To determine the value of all or any part of the
Company Property and of any services, Securities, property or other
consideration to be furnished to or acquired by the Company, and to
revalue all or any part of the Company Property, all in accordance with
such appraisals or other information as are reasonable, in their sole
judgment.
(xiii) Ownership and Voting Powers. To exercise all of the rights, powers,
options and privileges pertaining to the ownership of any Mortgages,
Securities, Real Estate, Secured Equipment Leases and other Company
Property to the same extent that an individual owner might, including
without limitation to vote or give any consent, request or notice or
waive any notice, either in person or by proxy or power of attorney,
which proxies and powers of attorney may be for any general or special
meetings or action, and may include the exercise of discretionary
powers.
(xiv) Officers, Etc.; Delegation of Powers. To elect, appoint or employ such
officers for the Company and such committees of the Board of Directors
with such powers and duties as the Directors may determine, the
Company's Bylaws provide or the MGCL requires; to engage, employ or
contract with and pay
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<PAGE>
compensation to any Person (including subject to Section 7.5 9.5 hereof,
any Director and Person who is an Affiliate of any Director) as agent,
representative, Advisor, member of an advisory board, employee or
independent contractor (including advisors, consultants, transfer agents,
registrars, underwriters, accountants, attorneys-at-law, real estate
agents, property and other managers, appraisers, brokers, architects,
engineers, construction managers, general contractors or otherwise) in
one or more capacities, to perform such services on such terms as the
Directors may determine; to delegate to one or more Directors, officers
or other Persons engaged or employed as aforesaid or to committees of
Directors, or to the Advisor, the performance of acts or other things
(including granting of consents), the making of decisions and the
execution of such deeds, contracts, leases or other instruments, either
in the names of the Company, the Directors or as their attorneys or
otherwise, as the Directors may determine; and to establish such
committees as they deem appropriate.
(xv) Associations. Subject to Section 7.5 9.5 hereof, to cause the Company to
enter into joint ventures, general or limited partnerships, participation
or agency arrangements or any other lawful combinations, relationships or
associations of any kind.
(xvi) Reorganizations, Etc. Subject to Sections 8.2 and 8.3 10.2 and 10.3
hereof, to cause to be organized or assist in organizing any Person
under the laws of any jurisdiction to acquire all or any part of the
Company Property, carry on any business in which the Company shall have
an interest or otherwise exercise the powers the Directors deem
necessary, useful or desirable to carry on the business of the Company
or to carry out the provisions of these Articles of Incorporation, to
merge or consolidate the Company with any Person; to sell, rent, lease,
hire, convey, negotiate, assign, exchange or transfer all or any part of
the Company Property to or with any Person in exchange for Securities of
such Person or otherwise; and to lend money to, subscribe for and
purchase the Securities of, and enter into any contracts with, any
Person in which the Company holds, or is about to acquire, Securities or
any other interests.
(xvii) Insurance. To purchase and pay for out of Company Property insurance
policies insuring the Company and the Company Property against any and
all risks, and insuring the Stockholders, Directors, officers,
Advisors, Affiliates, employees and agents of the Company individually
(each an "Insured") against all claims and liabilities of every nature
arising by reason of holding or having held any such status, office or
position or by reason of any action alleged to have been taken or
omitted by the Insured in such capacity, whether or not the Company
would have the power to indemnify against such claim or liability,
provided that such insurance be limited to the indemnification
permitted by Section 7.3 9.2 hereof in regard to any liability or loss
resulting from negligence, gross negligence, misconduct, willful
misconduct or an alleged violation of federal or state securities laws.
Nothing contained herein shall preclude the Company from purchasing and
paying for such types of insurance, including extended coverage
liability and casualty and workers' compensation, as would be customary
for any Person owning comparable assets and engaged in a similar
business, or from naming the Insured as an additional insured party
thereunder, provided that such addition does not add to the premiums
payable by the Company. The Board of Directors' power to purchase and
pay for such insurance policies shall be limited to policies that
comply with all applicable state laws and the NASAA REIT Guidelines.
(xviii) Executive Compensation, Pension and Other Plans. To adopt and
implement executive compensation, pension, profit sharing, share
option, share bonus, share purchase, share appreciation rights,
restricted share, savings, thrift, retirement, incentive or benefit
plans, trusts or provisions, applicable to any or all Directors,
officers, employees or agents of the Company, or to other Persons who
have benefited the Company, all on such terms and for such purposes as
the Directors may determine or the Bylaws provide.
(xix) Distributions. To declare and pay dividends Dividends or other
distributions to Stockholders, subject to the provisions of Section 5.4
7.4 hereof.
(xx) Indemnification. To the extent permitted by Section 7.3 9.2 hereof, to
indemnify any Person with whom the Company has dealings. The Board of
Directors' ability to indemnify any Person shall be
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limited to indemnification provisions that comply with all applicable
state laws and the NASAA REIT Guidelines.
(xxi) Charitable Contributions. To make donations for the public welfare or
for community, charitable, religious, educational, scientific, civic or
similar purposes, regardless of any direct benefit to the Company.
(xxii) Discontinue Operations; Bankruptcy. To discontinue the operations of
the Company (subject to Section 8.2 10.2 hereof); to petition or apply
for relief under any provision of federal or state bankruptcy,
insolvency or reorganization laws or similar laws for the relief of
debtors; to permit any Company Property to be foreclosed upon without
raising any legal or equitable defenses that may be available to the
Company or the Directors or otherwise defending or responding to such
foreclosure; to confess judgment against the Excess Shares Trust; or to
take such other action with respect to indebtedness or other
obligations of the Directors, the Company Property or the Company as
the Directors, in such capacity, and in their discretion may determine.
(xxii)(xxiii)Termination of Status. To terminate the status of the Company as
a real estate investment trust under the REIT Provisions of the Code;
provided, however, that the Board of Directors shall take no action to
terminate the Company's status as a real estate investment trust under
the REIT Provisions of the Code until such time as (i) the Board of
Directors adopts a resolution recommending that the Company terminate its
status as a real estate investment trust under the REIT Provisions of the
Code, (ii) the Board of Directors presents the resolution at an annual or
special meeting of the Stockholders and (iii) such resolution is approved
by the holders of two-thirds (2/3) of the issued and outstanding Common
Shares (as defined in Section 5.2 7.2 hereof).
(xxiv) Fiscal Year. Subject to the Code, to adopt, and from time to time
change, a fiscal year for the Company.
(xxv) Seal. To adopt and use a seal, but the use of a seal shall not be
required for the execution of instruments or obligations of the Company.
(xxvi) Bylaws. To adopt, implement and from time to time alter, amend or
repeal the Bylaws of the Company relating to the business and
organization of the Company, provided that such amendments are not
inconsistent with the provisions of these Articles of Incorporation,
and further provided that the Directors may not amend the Bylaws,
without the affirmative vote of a majority of the Equity Shares, to the
extent that such amendments adversely affect the rights, preferences
and privileges of Stockholders.
(xxvii) Listing Shares. To cause the listing of the Shares at any time after
completion of the Initial Public Offering but in no event shall such
Listing occur more than ten (10) years after completion of the
offering.
(xxviii)(xxii)Further Powers. To do all other acts and things and execute and
deliver all instruments incident to the foregoing powers, and to exercise
all powers which they deem necessary, useful or desirable to carry on the
business of the Company or to carry out the provisions of these Articles
of Incorporation, even if such powers are not specifically provided
hereby.
Section 3.3 3.3 Determination of Best Interest of Company.
In determining what is in the best interest of the Company, a Director
shall consider the interests of the Stockholders of the Company and, in his or
her sole and absolute discretion, may consider (i) the interests of the
Company's employees, suppliers, creditors and customers, (ii) the economy of
the nation, (iii) community and societal interests, and (iv) the long-term as
well as short-term interests of the Company and its Stockholders, including
the possibility that these interests may be best served by the continued
independence of the Company.
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ARTICLE IV:
ADVISOR
Section 4.1 Appointment and Initial Investment of Advisor.
The Directors are responsible for setting the general policies of the
Company and for the general supervision of its business conducted by officers,
agents, employees, advisors or independent contractors of the Company. However,
the Directors are not required personally to conduct the business of the
Company, and they may (but need not) appoint, employ or contract with any
Person (including a Person Affiliated with any Director) as an Advisor and may
grant or delegate such authority to the Advisor as the Directors may, in their
sole discretion, deem necessary or desirable. The term of retention of any
Advisor shall not exceed one (1) year, although there is no limit to the number
of times that a particular Advisor may be retained. The Advisor is the holder
of 20,000 Shares, representing an initial investment of $200,000.
Section 4.2 Supervision of Advisor.
The Directors shall evaluate the performance of the Advisor before entering
into or renewing an advisory contract and the criteria used in such evaluation
shall be reflected in the minutes of meetings of the Board. The Directors may
exercise broad discretion in allowing the Advisor to administer and regulate
the operations of the Company (including the Secured Equipment Lease program),
to act as agent for the Company to execute documents on behalf of the Company
and to make executive decisions which conform to general policies and
principles established by the Directors.
The Directors are responsible for monitoring the administrative procedures,
investment operations, Secured Equipment Lease program and performance of the
Company and the Advisor to assure that such procedures, operations and programs
are in the best interests of the Stockholders and are fulfilled.
The Board of Directors is also responsible for reviewing the fees and
expenses of the Company at least annually or with sufficient frequency to
determine that the expenses incurred are in the best interests of the
Stockholders. In addition, a majority of the Independent Directors and a
majority of Directors not otherwise interested in the transaction must approve
each transaction with the Advisor or its Affiliates. The Board of Directors
also will be responsible for reviewing the performance of the Advisor and
determining that compensation to be paid to the Advisor is reasonable in
relation to the nature and quality of services to be performed and the
investment performance of the Company and that the provisions of the Advisory
Agreement are being carried out. Specifically, the Board of Directors will
consider factors such as the Net Assets and Net Income of the Company, the
amount of the fee paid to the Advisor in relation to the size, composition and
performance of the Company's portfolio, the success of the Advisor in
generating opportunities that meet the investment objectives of the Company,
rates charged to other REITs and to investors other than REITs by advisors
performing the same or similar services, additional revenues realized by the
Advisor and its Affiliates through their relationship with the Company, whether
paid by the Company or by others with whom the Company does business, the
quality and extent of service and advice furnished by the Advisor, the
performance of the investment portfolio of the Company and the quality of the
portfolio of the Company relative to the investments generated by the Advisor
for its own account. The Directors also shall determine whether any successor
Advisor possesses sufficient qualifications to perform the advisory function
for the Company and whether the compensation provided for in its contract with
the Company is justified.
Section 4.3 Fiduciary Obligations.
The Advisor has a fiduciary responsibility to the Company and to the
Stockholders.
Section 4.4 Affiliation and Functions.
The Directors, by resolution or in the Bylaws, may provide guidelines,
provisions, or requirements concerning the affiliation and functions of the
Advisor.
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Section 4.5 Termination.
- ------------------
Either a majority of the Independent Directors or the Advisor may terminate
the advisory contract on sixty (60) days' written notice without cause or
penalty, and, in such event, the Advisor will cooperate with the Company and
the Directors in making an orderly transition of the advisory function.
Section 4.6 Real Estate Commission on Resale of Property.
- --------------------------------------------
The Company shall pay the Advisor a deferred, subordinated real estate
disposition fee upon Sale of one or more Properties, in an amount equal to the
lesser of (i) one-half (1/2) of a Competitive Real Estate Commission, or (ii)
three percent (3%) of the sales price of such Property or Properties. Payment
of such fee shall be made only if the Advisor provides a substantial amount of
services in connection with the Sale of a Property or Properties and shall be
subordinated to receipt by the Stockholders of Dividends equal to the sum of
(i) their aggregate Stockholders' 7% Return and (ii) their aggregate Invested
Capital. If, at the time of a Sale, payment of such disposition fee is deferred
because the subordination conditions have not been satisfied, then the
disposition fee shall be paid at such later time as the subordination
conditions are satisfied. Upon Listing, if the Advisor has accrued but not been
paid such real estate disposition fee, then for purposes of determining whether
the subordination conditions have been satisfied, stockholders will be deemed
to have received a Dividend in the amount equal to the product of the total
number of shares outstanding and the average closing price of the Shares over a
period, beginning 180 days after Listing, of 30 days during which the Shares
are traded.
Section 4.7 Subordinated Share of Net Sales Proceeds.
- ----------------------------------------
The Company shall pay the Advisor a deferred, subordinated share from a Sale
or Sales of a Property or Secured Equipment Lease, whether or not in
liquidation of the Company, equal to 10% of Net Sales Proceeds remaining after
receipt by the Stockholders of Dividends equal to the sum of (i) the
Stockholders' 7% Return and (ii) 100% of Invested Capital. Following Listing,
no share of Net Sales Proceeds will be paid to the Advisor.
Section 4.8 Incentive Fees.
- -------------------
(i) At such time, if any, as Listing occurs, the Advisor shall be paid the
Subordinated Incentive Fee in an amount equal to ten percent (10%) of the
amount by which (i) the market value of the Company (as defined below) plus
the total Dividends paid to Stockholders from the Company's inception until
the date of Listing exceeds (ii) the sum of (A) one hundred percent (100% )
of Invested Capital and (B) the total Dividends required to be paid to the
Stockholders in order to pay the Stockholders' 7% Return from inception
through the date the market value is determined. For purposes of
calculating the Subordinated Incentive Fee, the market value of the Company
shall be the average closing price or average of bid and asked price, as
the case may be, over a period of thirty (30) days during which the Shares
are traded with such period beginning one hundred eighty (180) days after
Listing. In the case of multiple Advisors, Advisors and any Affiliate shall
be allowed incentive fees provided such fees are distributed by a
proportional method reasonably designed to reflect the value added to
Company assets by each respective Advisor or any Affiliate. The
Subordinated Incentive Fee will be reduced by the amount of any prior
payment to the Advisor of a deferred, subordinated share of Net Sales
Proceeds from a Sale or Sales of a Property or Secured Equipment Lease.
(ii) In no event shall the Company pay a single Advisor both the Subordinated
Incentive Fee and the deferred subordinated share of Net Sales Proceeds.
(iii) In the event that the Company becomes a perpetual life entity (which will
occur) if the Shares become listed on a national securities exchange or
over-the-counter market, the Company and the Advisor will negotiate in
good faith a fee structure appropriate for an entity with a perpetual
life, subject to approval by a majority of the Independent Directors. In
negotiating a new fee structure, the Independent Directors shall
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consider all of the factors they deem relevant. These are expected to
include, but will not necessarily be limited to: (i) the amount of the
advisory fee in relation to the asset value, composition, and profitability
of the Company's portfolio; (ii) the success of the Advisor in generating
opportunities that meet the investment objectives of the Company; (iii) the
rates charged to other REITs and to investors other than REITs by Advisors
that perform the same or similar services; (iv) additional revenues
realized by the Advisor and its Affiliates through their relationship with
the Company, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether
paid by the Company or by others with whom the Company does business; (v)
the quality and extent of service and advice furnished by the Advisor; (vi)
the performance of the investment portfolio of the Company, including
income, conservation or appreciation of capital, and number and frequency
of problem investments; and (vii) the quality of the Property portfolio of
the Company in relationship to the investments generated by the Advisor for
its own account. The Board of Directors, including a majority of the
Independent Directors, may not approve a new fee structure that, in its
judgment, is more favorable to the Advisor than the current fee structure.
Section 4.9 Performance Fee.
- ---------------------
Upon termination of the Advisory Agreement, the Advisor shall be entitled
to receive a Performance Fee if performance standards satisfactory to a
majority of the Board of Directors, including a majority of the Independent
Directors, when compared to (a) the performance of the Advisor in comparison
with its performance for other entities; and (b) the performance of other
advisors for similar entities, have been met. If Listing has not occurred, the
Performance Fee, if any, shall equal ten percent (10%) of the amount, if any,
by which (i) the appraised value of the Properties and Secured Equipment
Leases on the Termination Date, less the amount of all indebtedness secured by
Properties and Secured Equipment Leases, plus the total Dividends paid to
Stockholders from the Company's inception through the Termination Date,
exceeds (ii) Invested Capital plus an amount equal to the Stockholders' 7%
Return from inception through the Termination Date. The Advisor shall be
entitled to receive all accrued but unpaid compensation and expense
reimbursements in cash within thirty (30) days of the Termination Date. All
other amounts payable to the Advisor in the event of a termination shall be
evidenced by a promissory note and shall be payable from time to time. The
Performance Fee shall be paid in twelve (12) equal quarterly installments
without interest on the unpaid balance, provided, however, that no payment
will be made in any quarter in which such payment would jeopardize the
Company's REIT status, in which case any such payment or payments will be
delayed until the net quarter in which payment would not jeopardize REIT
status. Notwithstanding the preceding sentence, any amounts which may be
deemed payable at the date the obligation to pay the Performance Fee is
incurred which relate to the appreciation of the Company's Properties shall be
an amount which provides compensation to the terminated Advisor only for that
portion of the holding period for the respective Properties during which such
terminated Advisor provided services to the Company. Upon Listing, the
Performance Fee, if any, payable thereafter will be as negotiated between the
Company and the Advisor. The Advisor shall not be entitled to payment of the
Performance Fee in the event the Advisory Agreement is terminated because of
failure of the Company and the Advisor to establish a fee structure
appropriate for a perpetual-life entity at such time, if any, as the Shares
become listed on a national securities exchange or over-the-counter market.
The Performance Fee, to the extent payable at the time of Listing, will not be
paid in the event that the Subordinated Incentive Fee is paid.
Section 4.10 Acquisition Fee and Acquisition Expenses.
- -----------------------------------------
The Company shall pay the advisor a fee in the amount of 4.5% of Gross
Proceeds from the sale of Shares as Acquisition Fees. The Acquisition Fees
shall be reduced to the extent that, and if necessary to limit, the total
compensation paid to all persons involved in the acquisition of any Property
to the amount customarily charged in arms-length transactions by other persons
or entities rendering similar services as an ongoing public activity in the
same geographical location and for comparable types of Properties, and to the
extent that other acquisition fees, finder's fees, real estate commissions, or
other similar fees or commissions are paid by any person in connection with
the transaction. The Company shall reimburse the Advisor for Acquisition
Expenses incurred in connection with the initial selection and acquisition of
Properties, provided that reimbursement shall
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be limited to the actual cost of goods and services used by the Company and
obtained from entities not affiliated with the Advisor, or the lesser of the
actual cost or 90% of the competitive rate charged by unaffiliated persons
providing similar goods and services in the same geographic location for goods
or services provided by the Advisor or its Affiliates. The total of all
Acquisition Fees and Acquisition Expenses shall be reasonable and shall not
exceed an amount equal to six percent (6%) of the contract price of a Property,
or in the case of a mortgage loan, six percent (6%) of the funds advanced
unless a majority of the Board of Directors, including a majority of the
Independent Directors, not otherwise interested in the transaction approves
fees in excess of these limits subject to a determination that the transaction
is commercially competitive, fair and reasonable to the Company.
Section 4.11 Asset Management Fee.
The Company shall pay the Advisor monthly Asset Management Fee in an amount
equal to one-twelfth of .60% of the Company's Real Estate Asset Value as of the
end of the preceding month. Specifically, Real Estate Asset Value equals the
amount invested in the Properties wholly owned by the Company, determined on
the basis of cost, plus, in the case of Properties owned by any Joint Venture
or partnership in which the Company is a co-venturer or partner, the portion of
the cost of such Properties paid by the Company, exclusive of Acquisition Fees
and Expenses. Payment of a portion of the monthly Asset Management Fee (one-
twelfth of .25% of the Company's Real Estate Asset Value) is noncumulative and
subordinated to payment of the Stockholders' 7% Return and will be payable in
arrears on a quarterly basis. The Asset 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 Asset Management Fee not
taken as to any fiscal year shall be deferred without interest and may not be
taken in such other fiscal year as the Advisor shall determine.
Section 4.12 Secured Equipment Lease Servicing Fee.
The Company shall pay the Advisor a fee out of the proceeds of the Loan for
negotiating Secured Equipment Leases and supervising the Secured Equipment
Lease program equal to 2% of the purchase price of the Equipment subject to
each Secured Equipment Lease and paid upon entering into such lease.
Section 4.13 Reimbursement for Operating Expenses.
The Company shall not reimburse the Advisor at the end of any fiscal quarter
Operating Expenses that, in the four consecutive fiscal quarters then ended
(the "Expense Year") exceed (the "Excess Amount") the greater of 2% of Average
Invested Assets or 25% of Net Income (the "2%/25% Guidelines") for such year.
If there is an Excess Amount in any Expense Year and the Independent Directors
determine that such excess was justified, based on unusual and nonrecurring
factors which they deem sufficient, the Excess Amount may be carried over and
included in Operating Expenses in subsequent Expense Years, and reimbursed to
the Advisor in one or more of such years, provided that Operating Expenses in
any Expense Year, including any Excess Amount to be paid to the Advisor, shall
not exceed the 2%/25% Guidelines. Within 60 days after the end of any fiscal
quarter of the Company for which total Operating Expenses for the Expense Year
exceed the 2%/25% Guidelines, there shall be sent to the Stockholders a written
disclosure of such fact, together with an explanation of the factors the
Independent Directors considered in determining that such excess expenses were
justified. Such determination shall be reflected in the minutes of the meetings
of the Board of Directors.
ARTICLE V: ARTICLE IV:
INVESTMENT OBJECTIVES AND OPERATING RESTRICTIONS LIMITATIONS
Section 5.1 4.1 Investment Objectives.
The Company's primary investment objectives are to preserve, protect, and
enhance the Company's assets; while (i) distributing Ddividends commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and Ddividends) and
providing
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protection against inflation through automatic increases in base rent and
receipt of percentage rent, and obtaining fixed income through the receipt of
payments on Secured Equipment Leases; and (iii) qualifying and remaining
qualified as a REIT for federal income tax purposes.; and (iv) providing
Stockholders of the Company with liquidity of their investment within five (5)
to ten (10) years after commencement of the offering, either in whole or in
part, through (a) Listing, or, (b) the commencement of orderly Sales of the
Company's Properties and Secured Equipment Leases, (outside the ordinary course
of business and consistent with its objective of qualifying as a REIT) and
distribution of the proceeds thereof. The sheltering from tax of income from
other sources is not an objective of the Company. Subject to Sections 3.2(ii)
and (xxiii) 3.2(v) hereof and to the restrictions set forth herein, the
Directors will use their best efforts to conduct the affairs of the Company in
such a manner as to continue to qualify the Company for the tax treatment
provided in the REIT Provisions of the Code; provided, however, no Director,
officer, employee or agent of the Company shall be liable for any act or
omission resulting in the loss of tax benefits under the Code, except to the
extent provided in Section 7.3 9.2 hereof.
Section 5.2 Review of Objectives.
The Independent Directors shall review the investment policies of the
Company with sufficient frequency and at least annually to determine that the
policies being followed by the Company at any time are in the best interests of
its Stockholders. Each such determination and the basis therefor shall be set
forth in the minutes of the meetings of the Board of Directors.
Section 5.3 Certain Permitted Investments.
(i) The Company may invest in Properties related to the fast-food, family-style
and casual dining segments of the restaurant industry, in various locations
across the United States.
(ii) The Company may invest in Joint Ventures with the Advisor, one or more
Directors or any Affiliate, if a majority of Directors (including a
majority of Independent Directors) not otherwise interested in the
transaction, approve such investment as being fair and reasonable to the
Company and on substantially the same terms and conditions as those
received by the other joint venturers.
(iii) The Company may invest in equity securities if a majority of Directors
(including a majority of Independent Directors) not otherwise interested
in the transaction approve such investment as being fair, competitive and
commercially reasonable.
(iv) The Company may offer Secured Equipment Leases to operators of Restaurant
Chains provided that a majority of Directors (including a majority of
Independent Directors) approve the Secured Equipment Leases as being fair,
competitive and commercially reasonable.
Section 5.4 4.2 Operating Restrictions. Investment Limitations.
--------------------------------------
In addition to other investment restrictions imposed by the Directors from
time to time, consistent with the Company's objective of qualifying as a REIT,
the following shall apply to the Company's investments:
(i) Not more than 10% of the Company's total assets shall be invested in
unimproved real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real property" does not include any
Property or Real Estate Financing property acquisitions under construction,
under contract for development or planned for development within one year.
(ii) The Company shall not invest in commodities or commodity future
contracts. This limitation is not intended to apply to interest rate
futures, when used solely for hedging purposes.
(iii) The Company shall not invest in or make mortgage loans unless an
appraisal is obtained concerning the underlying property. Mortgage
indebtedness on any property shall not exceed such property's appraised
value. In cases in which a majority of Independent Directors so determine,
and in all
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cases in which the mortgage loan involves the Advisor, Directors, or
Affiliates, such appraisal of the underlying property must be obtained from
an independent expert. Such appraisal shall be maintained in the Company's
records for at least five (5) years and shall be available for inspection
and duplication by any Stockholder. In addition to the appraisal, a
mortgagee's or owner's title insurance policy or commitment as to the
priority of the mortgage or condition of the title must be obtained.
(iv) The Company shall not make or invest in mortgage loans, including
construction loans, on any one (1) property if the aggregate amount of all
mortgage loans outstanding on the property, including the loans of the
Company would exceed an amount equal to eighty-five percent (85%) of the
appraised value of the property as determined by appraisal unless
substantial justification exists because of the presence of other
underwriting criteria. For purposes of this subsection, the "aggregate
amount of all mortgage loans outstanding on the Property, including the
loans of the Company" shall include all interest (excluding contingent
participation in income and/or appreciation in value of the mortgaged
property), the current payment of which may be deferred pursuant to the
terms of such loans, to the extent that deferred interest on each loan
exceeds five percent (5%) per annum of the principal balance of the loan.
(v) The Company shall not make or invest in any mortgage loans that are
subordinate to any mortgage, other indebtedness or equity interest of the
Advisor, the Director or their Affiliates. In addition, the Company shall
not invest in any security of any entity holding investments or engaging in
activities prohibited by these Articles of Incorporation.
(vi) The Company shall not invest in equity securities unless a majority
of the Directors (including a majority of Independent Directors) not
otherwise interested in such transaction approve the transaction as being
fair, competitive and commercially reasonable and determine that the
transaction will not jeopardize the Company's ability to qualify and remain
qualified as a REIT. Investments in entities affiliated with the Advisor, a
Director, the Company or their Affiliates are subject to restrictions on
Joint Venture investments.
(vii) The Company shall not issue (A) equity securities redeemable
solely at the option of the holder (except that Stockholders may offer
their Common Shares to the Company pursuant to that certain redemption plan
adopted or to be adopted by the Board of Directors on terms outlined in the
section relating to Common Shares entitled "Redemption of Shares" in the
Company's Prospectus relating to the Initial Public Offering); (B) debt
securities unless the historical debt service coverage (in the most
recently completed fiscal year) as adjusted for known charges is sufficient
to properly service that higher level of debt; (C) Equity Shares on a
deferred payment basis or under similar arrangements; (D) non-voting or
assessable securities; (E) options, warrants, or similar evidences of a
right to buy its securities (collectively, "Options") unless (1) issued to
all of its Stockholders ratably, (2) as part of a financing arrangement, or
(3) as part of a Stock Option Plan available to Directors, officers,
employees of the Company or the Advisor. Options may not be issued to the
Advisor, Director or any Affiliate thereof except on the same terms as such
Options are sold to the general public. Options may be issued to persons
other than the Advisor, Directors or any Affiliate thereof but not at
exercise prices less than the fair market value of the underlying
securities on the date of grant and not for consideration that in the
judgment of the Independent Directors has a market value less than the
value of such Option on the date of grant. Options issuable to the Advisor,
Directors or any Affiliate thereof shall not exceed 10% of the outstanding
Shares on the date of grant.
(viii) The Company shall not invest in real estate contracts of sale
unless such contracts of sale are in recordable form and appropriately
recorded in the chain of title.
(ix) A majority of the Directors shall authorize the consideration to be
paid for each Property, based on the fair market value of the Property. If
a majority of the Independent Directors determine, or if the Property is
acquired from the Advisor, a Director, or their Affiliates, such fair
market value shall be determined by a qualified independent real estate
appraiser selected by the Independent Directors.
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(x) The Company shall not engage in underwriting or the agency
distribution of securities issued by others or in trading, as compared to
investment activities.
(xi) The Company shall not invest in any foreign currency or bullion or
engage in short sales.
(xii) The Company shall not issue senior securities except notes to
banks and other lenders and Preferred Shares.
(xiii) The aggregate Leverage of the Company shall be reasonable in
relation to the Net Assets of the Company and shall be reviewed by the
Directors at least quarterly. The maximum amount of such Leverage in
relation to the Net Assets shall, in the absence of a satisfactory showing
that a higher level of borrowing is appropriate, not exceed three hundred
percent (300%). Any excess in Leverage over such three hundred percent
(300%) level shall be approved by at least a majority of the Independent
Directors and disclosed to Stockholders in the next quarterly report of the
Company, along with the justification for such excess.
(xiv) The Company may borrow money from the Advisor, Director or any
Affiliate thereof, upon a finding by a majority of Directors (including a
majority of Independent Directors) not otherwise interested in the
transaction that such transaction is fair, competitive and commercially
reasonable and no less favorable to the Company than loans between
unaffiliated parties under the same circumstances; provided, however, that
the Advisor and its Affiliates shall not make loans to the Company, or to
Joint Ventures in which the Company is a co-venturer, for the purchase of
Properties. Notwithstanding the foregoing, the Advisor and its Affiliates
shall be entitled to reimbursement, at cost, for actual expenses incurred
by the Advisor or its Affiliates on behalf of the Company or Joint Ventures
in which the Company is a co-venturer, subject to subsection (xix) below.
(xv) The Company shall not make loans to the Advisor or its Affiliates.
(xvi)(i) The Company shall not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as
amended.
(xvii)(ii) The Company will not make any investment that the Company
believes will be inconsistent with its objectives of qualifying and
remaining qualified as a REIT.
The foregoing objectives may not be modified or eliminated without the
approval of Stockholders owning a majority of the outstanding Common Equity
Shares.
ARTICLE VI:
CONFLICTS OF INTEREST
Section 6.1 Sales and Leases to Company.
The Company may purchase property from the Advisor, Director, or any
Affiliate upon a finding by a majority of Directors (including a majority of
Independent Directors) not otherwise interested in the transaction that such
transaction is fair and reasonable to the Company and at a price to the Company
no greater than the cost of the asset to such Advisor, Director or Affiliate,
or, if the price to the Company is in excess of such cost, that substantial
justification for such excess exists and such excess is reasonable. In no event
shall the cost of such asset to the Company exceed its current appraised value.
Section 6.2 Sales and Leases to the Advisor, Directors or Affiliates.
An Advisor, Director or Affiliate may acquire or lease assets from the
Company if a majority of Directors (including a majority of Independent
Directors) not otherwise interested in the transaction determine that the
transaction is fair and reasonable to the Company.
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Multiple Programs.
(i) Until completion of the initial public offering of Shares by the
Company, the Advisor and its Affiliates will not offer or sell interests in any
subsequently formed public program that has investment objectives and structure
similar to those of the Company and that intends to (a) invest, on a cash
and/or leveraged basis, in a diversified portfolio of restaurant properties
(either existing properties or properties upon which restaurants are to be
constructed) to be leased on a "triple-net" basis to operators of national and
regional fast-food, family-style, and casual dining restaurant chains; and (b)
offer Secured Equipment Leases. The Advisor and its Affiliates also will not
purchase property or offer Secured Equipment Leases for any such subsequently
formed public program until substantially all (generally, eighty percent (80%))
of the funds available for investment (net offering proceeds) by the Company
have been invested or committed to investment. (For purposes of the preceding
sentence only, funds are deemed to have been committed to investment to the
extent written agreements in principle or letters of understanding are executed
and in effect at any time, whether or not any such investment is consummated,
and also to the extent any funds have been reserved to make contingent payments
in connection with any Property, whether or not any such payments are made).
Affiliates of the Advisor are currently purchasing restaurant facilities,
including furniture, fixtures, and equipment, and incurring related costs for
public and private investor programs, which have investment objectives that are
not similar to those of the Company, but which make investments that include
"triple-net" leases of fast-food, family-style, and casual dining restaurant
properties. The Advisor or its Affiliates currently and in the future may offer
interests in one or more public or private investor programs organized to
purchase and lease fast-food, family-style, and casual dining restaurants on a
"triple-net" basis.
(ii) In the event that an investment opportunity becomes available which is
suitable for both the Company and a public or private entity with which the
Advisor or its Affiliates are affiliated for which both entities have
sufficient uninvested funds, then the entity which has had the longer period of
time elapse since it was offered an investment opportunity will first be
offered the investment opportunity. An investment opportunity will not be
considered suitable for a program if the requirements of subparagraph (i) above
could not be satisfied if the program were to make the investment. In
determining whether or not an investment opportunity is suitable for more than
one program, the Board of Directors and the Advisor will examine such factors,
among others, as the cash requirements of each program, the effect of the
acquisition both on diversification of each program's investments by types of
restaurants and geographic area, and on diversification of the tenants of its
properties (which also may affect the need for one of the programs to prepare
or produce audited financial statements for a property or a tenant), the
anticipated cash flow of each program, the size of the investment, the amount
of funds available to each program, and the length of time such funds have been
available for investment. If a subsequent development, such as a delay in the
closing of a property or a delay in the construction of a property, causes any
such investment, in the opinion of the Advisor, to be more appropriate for an
entity other than the entity which committed to make the investment, however,
the Advisor has the right to agree that the other entity affiliated with the
Advisor or its Affiliates may make the investment.
Section 6.4 Other Transactions.
(i) No goods or services will be provided by the Advisor or its Affiliates
to the Company except for transactions in which the Advisor or its Affiliates
provide goods or services to the Company in accordance with these Articles of
Incorporation or if a majority of the Directors (including a majority of the
Independent Directors) not otherwise interested in such transactions approve
such transactions as fair and reasonable to the Company and on terms and
conditions not less favorable to the Company than those available from
unaffiliated third parties.
(ii) The Company will not make any loans to Affiliates. The Advisor and its
Affiliates will not make loans to the Company, or to Joint Ventures in which
the Company is a co-venturer, for the purchase of Properties. Any loans to the
Company by the Advisor or its Affiliates for other purposes must be approved by
a majority of the Directors (including a majority of Independent Directors) not
otherwise interested in such transaction as fair, competitive, and commercially
reasonable, and no less favorable to the Company than comparable loans between
unaffiliated parties.
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ARTICLE VII: ARTICLE V:
SHARES
Section 7.1 5.1 Authorized Shares.
The capital stock of the Company shall be divided into Equity Shares. The
total number of Equity Shares which the Company is authorized to issue is two
hundred eighteen million five hundred thousand (218,500,000) one hundred forty-
three million five hundred thousand (143,500,000) shares of beneficial
interest, consisting of one hundred thirty-seven million five hundred thousand
(137,500,000) sixty-two million five hundred thousand (62,500,000) Common
Shares (as defined and described in Section 5.2 7.2(ii) hereof), three million
(3,000,000) Preferred Shares (as defined and described in Section 5.37.3
hereof) and seventy-eight million (78,000,000) Excess Shares (as defined and
described in Section 5.67.7 hereof). All Shares shall be fully paid and
nonassessable when issued. Shares may be issued for such consideration as the
Directors determine or, if issued as a result of a Share dividend or Share
split, without any consideration.
Section 7.2 5.2 Common Shares.
(i) Common Shares Subject to Terms of Preferred Shares. The Common Shares
shall be subject to the express terms of any series of Preferred Shares.
(ii) Description. Common Shares (herein so called) shall have a par value of
$.01 per share and shall entitle the holders to one (1) vote per share on all
matters upon which Stockholders are entitled to vote pursuant to Section 6.28.2
hereof, and shares of a particular class of issued Common Shares shall have
equal dividend, distribution, liquidation and other rights, and shall have no
preference, cumulative, preemptive, appraisal, conversion or exchange rights.
The Directors may classify or reclassify any unissued Common Shares by setting
or changing the number, designation, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of any such Common Shares and, in such event,
the Company shall file for record with the State Department of Assessments and
Taxation of the State of Maryland amended articles in substance and form as
prescribed by Title 2 of the MGCL.
(iii) Distribution Rights. The holders of Common Shares shall be entitled to
receive such Distributions as may be declared by the Board of Directors of the
Company out of funds legally available therefor.
(iv) Dividend or Distribution Rights. The Directors from time to time may
declare and pay to Stockholders such dividends or Distributions in cash or
securities as the Directors in their discretion shall determine. The Directors
shall endeavor to declare and pay such dividends and Distributions as shall be
necessary for the Company to qualify as a real estate investment trust under
the REIT Provisions of the Code; provided, however, Stockholders shall have no
right to any dividend or Distribution unless and until declared by the
Directors. The exercise of the powers and rights of the Directors pursuant to
this Section 5.2(iv) section shall be subject to the provisions of any class or
series of Equity Shares at the time outstanding. The receipt by any Person in
whose name any Equity Shares are registered on the records of the Company or by
his duly authorized agent shall be a sufficient discharge for all dividends or
Distributions distributions payable or deliverable in respect of such Equity
Shares and from all liability to see to the application thereof. Distributions
in kind shall not be permitted, except for distributions of readily marketable
securities; distributions of beneficial interests in a liquidating trust
established for the dissolution of the Company and the liquidation of its
assets in accordance with the terms of these Articles of Incorporation; or
distributions of in-kind property as long as the Directors (i) advise each
Stockholder of the risks associated with direct ownership of the property; (ii)
offer each Stockholder the election of receiving in-kind property
distributions; and (iii) distribute in-kind property only to those Stockholders
who accept the Directors' offer.
(v) Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up, or any distribution of the assets of
the Company, the aggregate assets available for distribution to
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holders of the Common Shares (including holders of Excess Shares resulting from
the exchange of Common Shares pursuant to Section 5.5(iii) 7.6(iii) hereof)
shall be determined in accordance with applicable law. Except as provided below
as a consequence of the limitations on distributions to holders of Excess
Shares, each holder of Common Shares shall be entitled to receive, ratably with
(i) each other holder of Common Shares and (ii) each holder of Excess Shares
resulting from the exchange of Common Shares, that portion of such aggregate
assets available for distribution as the number of the outstanding Common
Shares held by such holder bears to the total number of outstanding Common
Shares and Excess Shares resulting from the exchange of Common Shares then
outstanding. Anything herein to the contrary notwithstanding, in no event shall
the amount payable to a holder of Excess Shares exceed (i) the price per share
such holder paid for the Common Shares in the purported Transfer or Acquisition
(as those terms are defined in Section 5.5(i)7.6(i) or change in capital
structure or other transaction or event that resulted in the Excess Shares or
(ii) if the holder did not give full value for such Excess Shares (as through a
gift, a devise or other event or transaction), a price per share equal to the
Market Price (as that term is defined in Section 5.5(i)7.6(i) for the Common
Shares on the date of the purported Transfer, Acquisition, change in capital
structure or other transaction or event that resulted in such Excess Shares.
Any amount available for distribution in excess of the foregoing limitations
shall be paid ratably to the holders of Common Shares and other holders of
Excess Shares resulting from the exchange of Common Shares to the extent
permitted by the foregoing limitations.
(vi) Voting Rights. Except as may be provided in these Articles of
Incorporation, and subject to the express terms of any series of Preferred
Shares, the holders of the Common Shares shall have the exclusive right to vote
on all matters (as to which a holder of common stock Stockholder shall be
entitled to vote pursuant to applicable law) at all meetings of the
Stockholders of the Company, and shall be entitled to one (1) vote for each
Common Share entitled to vote at such meeting.
Section 7.3 5.3 Preferred Shares.
The Directors are hereby expressly granted the authority to authorize from
time to time the issuance of one or more series of Preferred Shares. Prior to
the issuance of each such series, the Board of Directors, by resolution, shall
fix the number of shares to be included in each series, and the terms, rights,
restrictions and qualifications of the shares of each series, however, the
voting rights for each share of the Preferred Shares shall not exceed voting
rights which bear the same relationship to the voting rights of the Common
Shares as the consideration paid to the Company for each of Preferred Shares
bears to the book value of the Common Shares or the date that such Preferred
Shares are issued. The authority of the Board of Directors with respect to each
series shall include, but not be limited to, determination of the following:
(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The dividend rate on the shares of the series, if any, whether any
dividends shall be cumulative and, if so, from which date or dates,
and the relative rights of priority, if any, of payment of
dividends on shares of the series.
(iii) The redemption rights, including conditions and the price or
prices, if any, for shares of the series.
(iv) The terms and amounts of any sinking fund for the purchase or
redemption of shares of the series.
(v) The rights of the shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs
of the Company, and the relative rights of priority, if any, of
payment of shares of the series.
(vi) Whether the shares of the series shall be convertible into shares
of any other class or series, or any other security, of the Company
or any other corporation or other entity, and, if so, the
specification of such other class or series of such other security,
the conversion price or prices or rate or rates, any adjustments
thereof, the date or dates on which such shares shall be
convertible and all other terms and conditions upon which such
conversion may be made.
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(vii) Restrictions on the issuance of shares of the same series or of
any other class or series.
(viii) The voting rights of the holders of shares of the series subject
to the limitations contained in this Section 5.37.3.
(ix) Any other relative rights, preferences and limitations on that
series.
Subject to the express provisions of any other series of Preferred Shares
then outstanding, and notwithstanding any other provision of these Articles of
Incorporation, the Board of Directors may increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares, or
alter the designation or classify or reclassify any unissued shares of a
particular series of Preferred Shares, by fixing or altering, in one or more
respects, from time to time before issuing the shares, the terms, rights,
restrictions and qualifications of the shares of any such series of Preferred
Shares.
Section 7.4 5.4 General Nature of Shares.
All Shares shall be personal property entitling the Stockholders only to
those rights provided in these Articles of Incorporation, the MGCL or in the
resolution creating any class or series of Shares. The legal ownership of the
Company Property and the right to conduct the business of the Company are
vested exclusively in the Directors; the Stockholders shall have no interest
therein other than the beneficial interest in the Company conferred by their
Shares and shall have no right to compel any partition, division, dividend or
Distribution of the Company or any of the Company Property. The death of a
Stockholder shall not terminate the Company or give his legal representative
any rights against other Stockholders, the Directors or the Company Property,
except the right, exercised in accordance with applicable provisions of the
Bylaws, to require the Company to reflect on its books the change in ownership
of the Shares. Holders of Shares shall not have any preemptive or other right
to purchase or subscribe for any class of securities of the Company which the
Company may at any time issue or sell.
Section 7.5 No Issuance Of Share Certificates.
The Company shall not issue share certificates. A Stockholder's investment
shall be recorded on the books of the Company. To transfer his or her Shares a
Stockholder shall submit an executed form to the Company, which form shall be
provided by the Company upon request. Such transfer will also be recorded on
the books of the Company. Upon issuance or transfer of shares, the Company will
provide the Stockholder with information concerning his or her rights with
regard to such stock, in a form substantially similar to Section 7.6(xii), and
required by the Bylaws and the MGCL or other applicable law.
Section 7.6 5.5 Restrictions On Ownership and Transfer.
(i) Definitions. For purposes of Sections 5.5 and 5.6, 7.6 and 7.7, the
following terms shall have the following meanings:
"Acquire" means the acquisition of Beneficial or Constructive Ownership of
Equity Shares by any means, including, without limitation, the exercise of any
rights under any option, warrant, convertible security, pledge or other
security interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquiror would be
considered a Beneficial Owner or Constructive Owner. The terms "Acquires" and
"Acquisition" shall have correlative meanings.
"Beneficial Ownership" means ownership of Shares by an individual who would
be treated as an owner of such Shares under Section 542(a)(2) of the Code,
either directly or constructively through the application of Section 544 of the
Code, as modified by Section 856(h)(1)(B) of the Code. For purposes of this
definition, the term "individual" shall include any organization, trust, or
other entity that is treated as an individual for purposes of Section 542(a)(2)
of the Code. The terms "Beneficial Owner," "Beneficially Owns" and
"Beneficially Owned" shall have correlative meanings.
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"Beneficiary" means a beneficiary of the Excess Shares Trust as determined
pursuant to Section 5.6(i)7.7(v)(a) hereof.
"Closing Price" on any day shall mean the last sale price, regular way on
such day, or, if no such sale takes place on that day, the average of the
closing bid and asked prices, regular way, in either case as reported on the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange, or if the
affected class or series of Equity Shares are not so listed or admitted to
trading, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
(including the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation System) on which the affected class or series
of Equity Shares are listed or admitted to trading, or, if the affected class
or series of Equity Shares are not so listed or admitted to trading, the last
quoted price or, if not quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal automated quotation system then in use, or, if the
affected class or series of Equity Shares are not so quoted by any such system,
the average of the closing bid and asked prices as furnished by a professional
market maker selected by the Board of Directors making a market in the affected
class or series of Equity Shares, or, if there is no such market maker or such
closing prices otherwise are not available, the fair market value of the
affected class or series of Equity Shares as of such day, as determined by the
Board of Directors in its discretion.
"Common Share Ownership Limit" means, with respect to the Common Shares,
nine point eight percent (9.8%) of the outstanding Common Shares, subject to
adjustment pursuant to Section 5.5(x)7.6(x) (but not more than nine point nine
percent (9.9%) of the outstanding Common Shares, as so adjusted) and to the
limitations contained in Section 5.5(xi)7.6(xi).
"Constructive Ownership" means ownership of Equity Shares by a Person person
who would be treated as an owner of such Equity Shares, shares, either actually
or constructively, directly or indirectly, through the application of Section
318 of the Code, as modified by Section 856(d)(5) thereof. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned" shall
have correlative meanings.
"Excess Shares Trust" means the trust created pursuant to Section
5.6(i)7.7(i) hereof.
"Excess Shares Trustee" means the Company as trustee for the Excess Shares
Trust, and any successor trustee appointed by the Company.
"Market Price" means, during the offering, the price per Equity Share and
thereafter, until the Equity Shares are listed for trading on an exchange or
market, a price determined on the basis of the quarterly valuation of the
Company's assets. Upon listing of the Shares, market price shall mean the
average of the Closing Prices for the ten (10) consecutive Trading Days
immediately preceding such day (or those days during such ten (10) Trading Day
day period for which Closing Prices are available).
"Ownership Limit" means the Common Share Ownership Limit or the Preferred
Share Ownership Limit, or both, as the context may require.
"Preferred Share Ownership Limit" means, with respect to the Preferred
Shares, nine point eight percent (9.8%) of the outstanding shares Shares of a
particular series of Preferred Shares of the Company, subject to adjustment
pursuant to Section 5.5(x)7.6(x) (but not more than nine point nine percent
(9.9%) of the outstanding Preferred Shares, as so adjusted) and to the
limitations contained in this Section 5.57.6.
"Purported Beneficial Holder" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the Person for whom the applicable Purported Record Holder held
the Equity Shares that were, pursuant to paragraph (iii) of this Section
5.5(iii)7.6, automatically exchanged for Excess Shares upon the occurrence of
such event or transaction. The Purported Beneficial Holder and the Purported
Record Holder may be the same Person.
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"Purported Beneficial Transferee" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the purported
beneficial transferee for whom the Purported Record Transferee would have
acquired Equity Shares if such Transfer or Acquisition which results in Excess
Shares had been valid under Section 5.5(ii)7.6(ii). The Purported Beneficial
Transferee and the Purported Record Transferee may be the same Person.
"Purported Record Holder" means, with respect to any event or transaction
other than a purported Transfer or Acquisition which results in Excess Shares,
the record holder of the Equity Shares that were, pursuant to Section
5.5(iii)7.6(iii), automatically exchanged for Excess Shares upon the occurrence
of such an event or transaction. The Purported Record Holder and the Purported
Beneficial Holder may be the same Person.
"Purported Record Transferee" means, with respect to any purported Transfer
or Acquisition which results in Excess Shares, the record holder of the Equity
Shares if such Transfer or Acquisition which results in Excess Shares had been
valid under Section 5.5(ii)7.6(ii). The Purported Record Transferee and the
Purported Beneficial Transferee may be the same Person.
"Restriction Termination Date" means the first day after the date of the
closing of the Initial Public Offering on which the Board of Directors of the
Company determines, pursuant to Section 3.2(xxiii) 3.2(xxii) hereof, that it is
no longer in the best interests of the Company to attempt or continue to
qualify as REIT.
"Trading Day" means a day on which the principal national securities
exchange on which the affected class or series of Equity Shares are listed or
admitted to trading is open for the transaction of business or, if the affected
class or series of Equity Shares are not listed or admitted to trading, shall
mean any day other than a Saturday, Sunday or other day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"Transfer" means any sale, transfer, gift, hypothecation, assignment, devise
or other disposition of a direct or indirect interest in Equity Shares or the
right to vote or receive dividends on Equity Shares (including (i) the granting
of any option (including any option to acquire an option or any series of such
options) or entering into any agreement for the sale, transfer or other
disposition of Equity Shares or the right to vote or receive dividends on
Equity Shares or (ii) the sale, transfer, assignment or other disposition of
any securities or rights convertible into or exchangeable for Equity Shares,
whether voluntary or involuntary, of record, constructively or beneficially,
and whether by operation of law or otherwise. The terms "Transfers,"
"Transferred" and "Transferable" shall have correlative meanings.
(ii) Ownership and Transfer Limitations.
(a) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.5(ix)7.6(ix) and
Section 5.77.8, from the date of the Initial Public Offering and prior
to the Restriction Termination Date, no Person shall Beneficially or
Constructively Own Equity Shares in excess of the Common or Preferred
Share Ownership Limit.
(b) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.5(ix)7.6(ix) and
Section 5.77.8, from the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer, Acquisition, change
in the capital structure of the Company, other purported change in
Beneficial or Constructive Ownership of Equity Shares or other event
or transaction that, if effective, would result in any Person
Beneficially or Constructively Owning Equity Shares in excess of the
Common or Preferred Share Ownership Limit shall be void ab initio as
to the Transfer, Acquisition, change in the capital structure of the
Company, other purported change in Beneficial or Constructive
Ownership or other event or transaction with respect to that number of
Equity Shares which would otherwise be Beneficially or Constructively
Owned by such Person in excess of the Common or Preferred Share
Ownership Limit, and none of the Purported Beneficial Transferee, the
Purported Record Transferee, the Purported Beneficial Holder or the
Purported Record Holder shall acquire any rights in that number of
Equity Shares.
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(c) Notwithstanding any other provision of these Articles of
Incorporation, and except as provided in Section 5.7, 7.8, from the
date of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer, Acquisition, change in the capital
structure of the Company, or other purported change in Beneficial or
Constructive Ownership (including actual ownership) of Equity Shares
or other event or transaction that, if effective, would result in the
Equity Shares being actually owned by fewer than 100 Persons
(determined without reference to any rules of attribution) shall be
void ab initio as to the Transfer, Acquisition, change in the capital
structure of the Company, other purported change in Beneficial or
Constructive Ownership (including actual ownership) with respect to
that number of Equity Shares which otherwise would be owned by the
transferee, and the intended transferee or subsequent owner (including
a Beneficial Owner or Constructive Owner) shall acquire no rights in
that number of Equity Shares.
(d) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.7, 7.8, from the date
of the Initial Public Offering and prior to the Restriction
Termination Date, any Transfer, Acquisition, change in the capital
structure of the Company, other purported change in Beneficial or
Constructive Ownership of Equity Shares or other event or transaction
that, if effective, would cause the Company to fail to qualify as a
REIT by reason of being "closely held" within the meaning of Section
856(h) of the Code or otherwise, directly or indirectly, would cause
the Company to fail to qualify as a REIT shall be void ab initio as to
the Transfer, Acquisition, change in the capital structure of the
Company, other purported change in Beneficial or Constructive
Ownership or other event or transaction with respect to that number of
Equity Shares which would cause the Company to be "closely held"
within the meaning of Section 856(h) of the Code or otherwise,
directly or indirectly, would cause the Company to fail to qualify as
a REIT, and none of the Purported Beneficial Transferee, the Purported
Record Transferee, the Purported Beneficial Holder or the Purported
Record Holder shall acquire any rights in that number of Equity
Shares.
(e) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.77.8, from the date of
the Initial Public Offering and prior to the Restriction Termination
Date, any Transfer, Acquisition, change in capital structure of the
Company, or other purported change in Beneficial or Constructive
Ownership of Equity Shares or other event or transaction that, if
effective, would (i) cause the Company to own (directly or
Constructively an interest in a tenant that is described in Section
856(d)(2)(B) of the Code and (ii) cause the Company to fail to satisfy
any of the gross income requirements of Section 856(c) of the Code,
shall be void ab initio as to the Transfer, Acquisition, change in
capital structure of the Company, other purported change in Beneficial
or Constructive Ownership or other event or transaction with respect
to that number of Equity Shares which would cause the Company to own
an interest (directly or Constructively) in a tenant that is described
in Section 856(d)(2)(B) of the Code, and none of the Purported
Beneficial Transferee, the Purported Record Transferee, the Purported
Beneficial Holder or the Purported Record Holder shall acquire any
rights in that number of Equity Shares.
(f) Notwithstanding any other provision of these Articles of
Incorporation, any person selling securities on behalf of the Company
in its Initial Public Offering may not complete a sale of securities
to a Stockholder until at least five (5) business days after the date
the Stockholder receives a final Prospectus and shall send each
Stockholder a confirmation of his or her purchase.
(iii)Exchange for Excess Shares.
(a) If, notwithstanding the other provisions contained in this Article V,
Article VII, at any time from the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported
Transfer, Acquisition, change in the capital structure of the Company,
other purported change in the Beneficial or Constructive Ownership of
Equity Shares or other event or transaction such that any Person would
either Beneficially or Constructively Own Equity Shares in excess of
the Common or Preferred Share Ownership Limit, then, except as
otherwise provided in Section 5.5(ix)7.6(ix), such
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Equity Shares (rounded up to the next whole number of shares) in excess
of the Common or Preferred Share Ownership Limit automatically shall be
exchanged for an equal number of Excess Shares having terms, rights,
restrictions and qualifications identical thereto, except to the extent
that this Article V Article VII requires different terms. Such exchange
shall be effective as of the close of business on the business day next
preceding the date of the purported Transfer, Acquisition, change in
capital structure, other change in purported Beneficial or Constructive
Ownership of Equity Shares, or other event or transaction.
(b) If, notwithstanding the other provisions contained in this Article V,
Article VII, at any time after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported
Transfer, Acquisition, change in the capital structure of the Company,
other purported change in the Beneficial or Constructive Ownership of
Equity Shares or other event or transaction which, if effective, would
result in a violation of any of the restrictions described in
subparagraphs (b), (c), (d) and (e) paragraph (ii) of this Section
5.5(ii)7.6 or, directly or indirectly, would cause the Company for any
reason to fail to qualify as a REIT by reason of being "closely held"
within the meaning of Section 856(h) of the Code, or otherwise,
directly or indirectly, would cause the Company to fail to qualify as
a REIT, then the Equity Shares (rounded up to the next whole number of
shares) Shares) being Transferred or which are otherwise affected by
the change in capital structure or other purported change in
Beneficial or Constructive Ownership and which, in any case, would
cause the Company to be "closely held" within the meaning of such
Section 856(h) or otherwise would cause the Company to fail to qualify
as a REIT automatically shall be exchanged for an equal number of
Excess Shares having terms, rights, restrictions and qualifications
identical thereto, except to the extent that this Article V Article
VII requires different terms. Such exchange shall be effective as of
the close of business on the business day prior to the dat of the
purported Transfer, Acquisition, change in capital structure, other
purported change in Beneficial or Constructive Ownership or other
event or transaction.
(iv) Remedies For Breach. If the Board of Directors or its designee shall at
any time determine in good faith that a Transfer, Acquisition, change in
the capital structure of the Company or other purported change in
Beneficial or Constructive Ownership or other event or transaction has
taken place in violation of Section 5.5(ii)7.6(ii) or that a Person
intends to Acquire or has attempted to Acquire Beneficial or Constructive
Ownership of any Equity Shares in violation of this Section 5.57.6, the
Board of Directors or its designee shall take such action as it deems
advisable to refuse to give effect to or to prevent such Transfer,
Acquisition, change in the capital structure of the Company, other attempt
to Acquire Beneficial or Constructive Ownership of any Equity Shares or
other event or transaction, including, but not limited to, refusing to
give effect thereto on the books of the Company or instituting injunctive
proceedings with respect thereto; provided, however, that any Transfer,
Acquisition, change in the capital structure of the Company, attempted
Transfer or other attempt to Acquire Beneficial or Constructive Ownership
of any Equity Shares or other event or transaction in violation of
subparagraphs (b), (c), (d) and (e) of Section 5.5(ii)7.6(ii) (as
applicable) shall be void ab initio and where applicable automatically
shall result in the exchange described in Section 5.5(iii)7.6(iii),
irrespective of any action (or inaction) by the Board of Directors or its
designee.
(v) Notice of Restricted Transfer. Any Person who acquires or attempts to
Acquire Beneficial or Constructive Ownership of Equity Shares in violation
of Section 5.5(ii)7.6(ii) and any Person who Beneficially or Constructively
Owns Excess Shares as a transferee of Equity Shares resulting in an
exchange for Excess Shares, pursuant to Section 5.5(iii)7.6(iii), or
otherwise shall immediately give written notice to the Company, or, in the
event of a proposed or attempted Transfer, Acquisition, or purported change
in Beneficial or Constructive Ownership, shall give at least fifteen (15)
days prior written notice to the Company, of such event and shall promptly
provide to the Company such other information as the Company, in its sole
discretion, may request in order to determine the effect, if any, of such
Transfer, attempted Transfer, Acquisition, Attempted Acquisition or
purported change in Beneficial or Constructive Ownership on the Company's
status as a REIT.
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(vi) Owners Required To Provide Information. Prior From the date of the Initial
Public Offering and prior to the Restriction Termination Date:
(a) Every Beneficial or Constructive Owner of more than five percent (5%),
or such lower percentages as determined pursuant to regulations under
the Code or as may be requested by the Board of Directors, in its sole
discretion, of the outstanding shares of any class or series of Equity
Shares of the Company shall annually, no later than January 31 of each
calendar year, give written notice to the Company stating (i) the name
and address of such Beneficial or Constructive Owner; (ii) the number
of shares of each class or series of Equity Shares Beneficially or
Constructively Owned; and (iii) a description of how such shares are
held. Each such Beneficial or Constructive Owner promptly shall
provide to the Company such additional information as the Company, in
its sole discretion, may request in order to determine the effect, if
any, of such Beneficial or Constructive Ownership on the Company's
status as a REIT and to ensure compliance with the Common or Preferred
Share Ownership Limit and other restrictions set forth herein.
(b) Each Person who is a Beneficial or Constructive Owner of Equity Shares
and each Person (including the Stockholder of record) who is holding
Equity Shares for a Beneficial or Constructive Owner promptly shall
provide to the Company such information as the Company, in its sole
discretion, may request in order to determine the Company's status as
a REIT, to comply with the requirements of any taxing authority or
other governmental agency, to determine any such compliance or to
ensure compliance with the Common or Preferred Share Ownership Limit
and other restrictions set forth herein.
(vii) Remedies Not Limited. Nothing contained in this ARTICLE V ARTICLE VII
except Section 5.7 7.8 shall limit scope or application of the provisions
of this Section 5.57.6, the ability of the Company to implement or
enforce compliance with the terms thereof or the authority of the Board
of Directors to take any such other action or actions as it may deem
necessary or advisable to protect the Company and the interests of its
Stockholders by preservation of the Company's status as a REIT and to
ensure compliance with the Ownership Limits for each any class or series
of Equity Shares and other restrictions set forth herein, including,
without limitation, refusal to give effect to a transaction on the books
of the Company.
(viii) Ambiguity. In the case of an ambiguity in the application of any of the
provisions of this Section 5.57.6, including any definition contained in
Sections 1.51.5 and 5.5(i)7.6(i), the Board of Directors shall have the
power and authority, in its sole discretion, to determine the
application of the provisions of this Section 5.57.6 with respect to any
situation based on the facts known to it.
(ix) Exception. 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, in each
case to the effect that the restrictions contained in subparagraphs (c),
(d) and (e) of Section 5.5(ii)7.6(ii) will not be violated, may waive or
change, in whole or in part, the application of the Common or Preferred
Share Ownership Limit with respect to any Person that is not an
individual, as such term is 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 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 Shares on the Company's status as a REIT.
(x) Increase in Common or Preferred Share Ownership Limit. Subject to the
limitations contained in Section 5.5(xi)7.6(xi), the Board of Directors may
from time to time increase the Common or Preferred Share Ownership Limit.
(xi) Limitations on Modifications.
(a) The Ownership Limit for a class or series of Equity Shares may not be
increased and no additional ownership limitations may be created if,
after giving effect to such increase or creation, the
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Company would be "closely held" within the meaning of Section 856(h) of
the Code (assuming ownership of shares of Equity Shares by all Persons
equal to the greatest of (A) the actual ownership, (B) the Beneficial
Ownership of Equity Shares by each Person, or (C) the applicable
Ownership Limit with respect to such Person.
(b) Prior to any modification of the Ownership Limit with respect to any
Person, the Board of Directors may 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 the Company's status as a REIT.
(c) Neither the Preferred Share Ownership Limit nor the Common Share
Ownership Limit may be increased to a percentage that is greater than
nine point nine percent (9.9%).
(xii) Notice to Stockholders Upon Issuance or Transfer. Upon issuance or
transfer of Shares, the Company shall provide the recipient with a
notice containing information about the shares purchased or otherwise
transferred, in lieu of issuance of a share certificate, in a form
substantially similar to the following:
"The securities issued or transferred are subject to restrictions on
transfer and ownership for the purpose of maintenance of the Company's status
as a real estate investment trust (a "REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"). Except as
otherwise provided pursuant to the Articles of Incorporation of the Company,
no Person may (i) Beneficially or Constructively Own Common Shares of the
Company in excess of 9.8% (or such greater percent as may be determined by the
Board of Directors of the Company) of the outstanding Common Shares; (ii)
Beneficially or Constructively Own shares of any series of Preferred Shares of
the Company in excess of 9.8% of the outstanding shares of such series of
Preferred Shares; or (iii) Beneficially or Constructively Own Common Shares or
Preferred Shares (of any class or series) which would result in the Company
being "closely held" under Section 856(h) of the Code or which otherwise would
cause the Company to fail to qualify as a REIT. Any Person who has Beneficial
or Constructive Ownership, or who Acquires or attempts to Acquire Beneficial
or Constructive Ownership of Common Shares and/or Preferred Shares in excess
of the above limitations and any Person who Beneficially or Constructively
Owns Excess Shares as a transferee of Common or Preferred Shares resulting in
an exchange for Excess Shares (as described below) immediately must notify the
Company in writing or, in the event of a proposed or attempted Transfer or
Acquisition or purported change in Beneficial or Constructive Ownership, must
give written notice to the Company at least 15 days prior to the proposed or
attempted transfer, transaction or other event. Any Transfer or Acquisition of
Common Shares and/or Preferred Shares or other event which results in
violation of the ownership or transfer limitations set forth in the Company's
Articles of Incorporation shall be void ab initio and the Purported Beneficial
and Record Transferee shall not have or acquire any rights in such Common
Shares and/or Preferred Shares. If the transfer and ownership limitations
referred to herein are violated, the Common Shares or Preferred Shares
represented hereby automatically will be exchanged for Excess Shares to the
extent of violation of such limitations, and such Excess Shares will be held
in trust by the Company, all as provided by the Articles of Incorporation of
the Company. All defined terms used in this legend have the meanings
identified in the Company's Articles of Incorporation, as the same may be
amended from time to time, a copy of which, including the restrictions on
transfer, will be sent without charge to each Stockholder who so requests."
Section 7.7 5.6 Excess Shares.
(i) Ownership In Trust. Upon any purported Transfer, Acquisition, change in
the capital structure of the Company, other purported change in Beneficial
or Constructive Ownership or event or transaction that results in Excess
Shares pursuant to Section 5.5(iii)7.6(iii), such Excess Shares shall be
deemed to have been transferred to the Company, as Excess Shares Trustee
of an Excess Shares Trust for the benefit of such Beneficiary or
Beneficiaries to whom an interest in such Excess Shares may later be
transferred pursuant to Section 5.5(v)7.6(v). Excess Shares so held in
trust shall be issued and outstanding stock of the Company. The Purported
Record Transferee (or Purported Record Holder) shall have no rights in
such
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Excess Shares except the right to designate a transferee of such Excess
Shares upon the terms specified in Section 5.5(v)7.6(v). The Purported
Beneficial Transferee shall have no rights in such Excess Shares except as
provided in Section 5.6(iii) and (v). 7.7(iii) and (v) .
(ii) Distribution Rights. Excess Shares shall not be entitled to any dividends
or Distributions (except as provided in Section 5.6(iii)7.7(iii)). Any
dividend or Distribution paid prior to the discovery by the Company that
the Equity Shares have been exchanged for Excess Shares shall be repaid
to the Company upon demand, and any dividend or Distribution declared but
unpaid at the time of such discovery shall be void ab initio with respect
to such Excess Shares.
(iii) Rights Upon Liquidation.
(a) Except as provided below, in the event of any voluntary or involuntary
liquidation, dissolution or winding up, or any other distribution of
the assets, of the Company, each holder of Excess Shares resulting from
the exchange of Preferred Shares of any specified series shall be
entitled to receive, ratably with each other holder of Excess Shares
resulting from the exchange of Preferred Shares of such series and each
holder of Preferred Shares of such series, such accrued and unpaid
dividends, liquidation preferences and other preferential payments, if
any, as are due to holders of Preferred Shares of such series. In the
event that holders of shares of any series of Preferred Shares are
entitled to participate in the Company's distribution of its residual
assets, each holder of Excess Shares resulting from the exchange of
Preferred Shares of any such series shall be entitled to participate,
ratably with (A) each other holder of Excess Shares resulting from the
exchange of Preferred Shares of all series entitled to so participate;
(B) each holder of Preferred Shares of all series entitled to so
participate; and (C) each holder of Common Shares and Excess Shares
resulting from the exchange of Common Shares (to the extent permitted
by Section 5.5(iii)7.6(iii) hereof), that portion of the aggregate
assets available for distribution (determined in accordance with
applicable law) as the number of shares of such Excess Shares held by
such holder bears to the total number of (1) outstanding Excess Shares
resulting from the exchange of Preferred Shares of all series entitled
to so participate; (2) outstanding Preferred Shares of all series
entitled to so participate; and (3) outstanding Common Shares and
Excess Shares resulting from the exchange of Common Shares. The
Company, as holder of the Excess Shares in trust, or, if the Company
shall have been dissolved, any trustee appointed by the Company prior
to its dissolution, shall distribute ratably to the Beneficiaries of
the Excess Shares Trust, when determined, any such assets received in
respect of the Excess Shares in any liquidation, dissolution or winding
up, or any distribution of the assets, of the Company. Anything to the
contrary herein notwithstanding, in no event shall the amount payable
to a holder with respect to Excess Shares resulting from the exchange
of Preferred Shares exceed (A) the price per share such holder paid for
the Preferred Shares in the purported Transfer, Acquisition, change in
capital structure or other transaction or event that resulted in the
Excess Shares or (B) if the holder did not give full value for such
Excess Shares (as through a gift, devise or other event or
transaction), a price per share equal to the Market Price for the
shares of Preferred Shares on the date of the purported Transfer,
Acquisition, change in capital structure or other transaction or event
that resulted in such Excess Shares. Any amount available for
distribution in excess of the foregoing limitations shall be paid
ratably to the holders of Preferred Shares and Excess Shares resulting
from the exchange of Preferred Shares to the extent permitted by the
foregoing limitations.
(b) Except as provided below, in the event of any voluntary or involuntary
liquidation, dissolution or winding up, or any other distribution of
the assets, of the Company, each holder of Excess Shares resulting from
the exchange of Common Shares shall be entitled to receive, ratably
with (A) each other holder of such Excess Shares and (B) each holder of
Common Shares, that portion of the aggregate assets available for
distribution to holders of Common Shares (including holders of Excess
Shares resulting from the exchange of Common Shares pursuant to Section
5.5(iii)7.6(iii)), determined in accordance with applicable law, as the
number of such Excess Shares held by such holder bears to the total
number of outstanding Common Shares and outstanding Excess Shares
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resulting from the exchange of Common Shares then outstanding. The
Company, as holder of the Excess Shares in trust, or, if the Company
shall have been dissolved, any trustee appointed by the Company prior to
its dissolution, shall distribute ratably to the Beneficiaries of the
Excess Shares, when determined, any such assets received in respect of
the Excess Shares in any liquidation, dissolution or winding up, or any
distribution of the assets, of the Company. Anything herein to the
contrary notwithstanding, in no event shall the amount payable to a
holder with respect to Excess Shares exceed (A) the price per share such
holder paid for the Equity Shares in the purported Transfer,
Acquisition, change in capital structure or other transaction or event
that resulted in the Excess Shares or (B) if the holder did not give
full value for such Equity Shares (as through a gift, devise or other
event or transaction), a price per share equal to the Market Price for
the Equity Shares on the date of the purported Transfer, Acquisition,
change in capital structure or other transaction or event that resulted
in such Excess Shares. Any amount available for distribution in excess
of the foregoing limitations shall be paid ratably to the holders of
Common Shares and Excess Shares resulting from the exchange of Common
Shares to the extent permitted by the foregoing limitations.
(iv) Voting Rights. The holders of Excess Shares shall not be entitled to vote
on any matters (except as required by the MGCL).
(v) Restrictions on Transfer; Designation of Beneficiary.
(a) Excess Shares shall not be transferable. The Purported Record
Transferee (or Purported Record Holder) may freely designate a
Beneficiary of its interest in the Excess Shares Trust (representing
the number of Excess Shares held by the Excess Shares Trust
attributable to the purported Transfer or Acquisition that resulted in
the Excess Shares), if (A) the Excess Shares held in the Excess Shares
Trust would not be Excess Shares in the hands of such Beneficiary and
(B) the Purported Beneficial Transferee (or Purported Beneficial
Holder) does not receive a price for designating such Beneficiary that
reflects a price per share for such Excess Shares that exceeds (1) the
price per share such Purported Beneficial Transferee (or Purported
Beneficial Holder) paid for the Equity Shares in the purported
Transfer, Acquisition, change in capital structure, or other
transaction or event that resulted in the Excess Shares or (2) if the
Purported Beneficial Transferee (or Purported Beneficial Holder) did
not give value for such Excess Shares (as through a gift, devise or
other event or transaction), a price per share equal to the Market
Price for the Equity Shares on the date of the purported Transfer,
Acquisition, change in capital structure, or other transaction or event
that resulted in the Excess Shares. Upon such transfer of an interest
in the Excess Shares Trust, the corresponding Excess Shares in the
Excess Shares Trust automatically shall be exchanged for an equal
number of Equity Shares (depending on the type and class of Shares that
were originally exchanged for such Excess Shares), and such Equity
Shares shall be transferred of record to the Beneficiary of the
interest in the Excess Shares Trust designated by the Purported Record
Transferee (or Purported Record Holder), as described above, if such
Equity Shares would not be Excess Shares in the hands of such
Beneficiary. Prior to any transfer of any interest in the Excess Shares
Trust, the Purported Record Transferee (or Purported Record Holder)
must give advance written notice to the Company of the intended
transfer and the Company must have waived in writing its purchase
rights under Section 5.6(vi). 7.7(vi).
(b) Notwithstanding the foregoing, if a Purported Beneficial Transferee (or
Purported Beneficial Holder) receives a price for designating a
Beneficiary of an interest in the Excess Shares Trust that exceeds the
amounts allowable under subparagraph (i) of this Section 5.5(v)7.6(v),
such Purported Beneficial Transferee (or Purported Beneficial Holder)
shall pay, or cause the Beneficiary of the interest in the Excess
Shares Trust to pay, such excess in full to the Company.
(c) If any of the transfer restrictions set forth in this Section 5.5(v),
7.6(v), or any application thereof, are determined to be void, invalid
or unenforceable by any court having jurisdiction over the issue, the
Purported Record Transferee (or Purported Record Holder) may be deemed,
at the option of the Company, to have acted as the agent of the Company
in acquiring the Excess Shares as to which such restrictions would
otherwise, by their terms, apply and to hold such Excess Shares on
behalf of the Company.
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(vi) Purchase Right in Excess Shares. Excess Shares shall be deemed to have
been offered for sale to the Company, or its designee, at a price per
share equal to the lesser of (i) the price per share in the transaction
that created such Excess Shares (or, in the case of devise or gift or
event other than a Transfer or Acquisition which results in the issuance
of Excess Shares, the Market Price at the time of such devise or gift or
event other than a Transfer or Acquisition which results in the issuance
of Excess Shares) and (ii) the Market Price of the Equity Shares exchanged
for such Excess Shares on the date the Company, or its designee, accepts
such offer. The Company and its assignees shall have the right to accept
such offer for a period of ninety (90) days after the later of (i) the
date of the purported Transfer, Acquisition, change in capital structure
of the Company, purported change in Beneficial Ownership or other event or
transaction which resulted in such Excess Shares and (ii) the date on
which the Board of Directors determines in good faith that a Transfer,
Acquisition, change in capital structure of the Company, purported change
in Beneficial or Constructive Ownership resulting in Excess Shares has
occurred, if the Company does not receive a notice pursuant to Section
5.5(v)7.6(v), but in no event later than a permitted Transfer pursuant to
and in compliance with the terms of Section 5.6(v). 7.7(v).
(vii) Remedies Not Limited. Nothing contained in this Article V Article VII
except Section 5.7 7.8 shall limit scope or application of the provisions
of this Section 5.67.7, the ability of the Company to implement or
enforce compliance with the terms hereof or the authority of the Board of
Directors to take any such other action or actions as it may deem
necessary or advisable to protect the Company and the interests of its
Stockholders by preservation of the Company's status as a REIT and to
ensure compliance with applicable Share Ownership Limits and the other
restrictions set forth herein, including, without limitation, refusal to
give effect to a transaction on the books of the Company.
(viii) Authorization. At such time as the Board of Directors authorizes a
series of Preferred Shares pursuant to Section 5.37.3 of this Article V,
Article VII, without any further or separate action of the Board of
Directors, there shall be deemed to be authorized a series of Excess
Shares consisting of the number of shares included in the series of
Preferred Shares so authorized and having terms, rights, restrictions
and qualifications identical thereto, except to the extent that such
Excess Shares are already authorized or this Article V Article VII
requires different terms.
Section 7.85.7 Settlements.
Nothing in Sections 5.57.6 and 5.67.7 or in any other provision of these
Articles of Incorporation shall preclude the settlement of any transaction with
respect to the Common Shares entered into through the facilities of the New
York Stock Exchange or other national securities exchange on which the Common
Shares are listed.
Section 7.95.8 Severability.
If any provision of this Article V Article VII or any application of any
such provision is determined to be void, invalid or unenforceable by any court
having jurisdiction over the issue, the validity and enforceability of the
remaining provisions of this Article V Article VII shall not be affected and
other applications of such provision shall be affected only to the extent
necessary to comply with the determination of such court.
Section 7.105.9 Waiver.
The Company shall have authority at any time to waive the requirements that
Excess Shares be issued or be deemed outstanding in accordance with the
provisions of this Article V Article VII if the Company determines, based on an
opinion of nationally recognized tax counsel, that the issuance of such Excess
Shares or the fact that such Excess Shares are deemed to be outstanding, would
jeopardize the status of the Company as a REIT (as that term is defined in
Section 1.51.5).
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ARTICLE VIII:ARTICLE VI:
STOCKHOLDERS
Section 8.16.1 Meetings of Stockholders.
There shall be an annual meeting of the Stockholders, to be held at such
time and place as shall be determined by or in the manner prescribed in the
Bylaws, at which the Directors shall be elected and any other proper business
may be conducted. The annual meeting will be held at a location convenient to
the Stockholders, on a date which is a reasonable period of time following the
distribution of the Company's annual report to Stockholders but not less than
thirty (30) days after delivery of such report. A majority of Stockholders
present in person or by proxy at an annual meeting at which a quorum is
present, may, without the necessity for concurrence by the Directors, vote to
elect the Directors. Special meetings of Stockholders may be called in the
manner provided in the Bylaws, including at any time by Stockholders holding,
in the aggregate, not less than ten percent (10%) of the outstanding Equity
Shares entitled to be cast on any issue proposed to be considered at any such
special meeting. If there are no Directors, the officers of the Company shall
promptly call a special meeting of the Stockholders entitled to vote for the
election of successor Directors. Any meeting may be adjourned and reconvened as
the Directors determine or as provided by the Bylaws.
Section 8.26.2 Voting Rights of Stockholders.
Subject to the provisions of any class or series of Shares then outstanding
and the mandatory provisions of any applicable laws or regulations, the
Stockholders shall be entitled to vote only on the following matters; (a)
election or removal of Directors as provided in Sections 2.3, 2.5 and 6.1 8.1,
2.4 and 2.7 hereof; (b) amendment of these Articles of Incorporation as
provided in Section 8.110.1 hereof; (c) termination of the Company as provided
in Section 11.2 hereof; (cd) reorganization of the Company as provided in
Section 8.210.2 hereof; (de) merger, consolidation or sale or other disposition
of all or substantially all of the Company Property, as provided in Section
8.310.3 hereof; and (ef) termination of the Company's status as a real estate
investment trust under the REIT Provisions of the Code, as provided in Section
3.2(xxiii) 3.2(xxiii) hereof. The Stockholders may terminate the status of the
Company as a REIT under the Code by a vote of two-thirds of the Shares
outstanding and entitled to vote. Except with respect to the foregoing matters,
no action taken by the Stockholders at any meeting shall in any way bind the
Directors.
Section 8.3Voting Limitations on Shares held by the Advisor, Directors and
Affiliates.
With respect to Shares owned by the Advisor, the Directors, or any of their
Affiliates, neither the Advisor, nor the Directors, nor any of their Affiliates
may vote or consent on matters submitted to the Stockholders regarding the
removal of the Advisor, Directors or any of their Affiliates or any transaction
between the Company and any of them. In determining the requisite percentage in
interest of Shares necessary to approve a matter on which the Advisor,
Directors and any of their Affiliates may not vote or consent, any Shares owned
by any of them shall not be included.
Section 8.46.3 Stockholder Action to be Taken by Meeting.
Any action required or permitted to be taken by the Stockholders of the
Company must be effected at a duly called annual or special meeting of
Stockholders of the Company and may not be effected by any consent in writing
of such Stockholders.
Section 8.56.4 Right of Inspection.
Any Stockholder and any designated representative thereof shall be permitted
access to all records of the Company at all reasonable times, and may inspect
and copy any of them for a reasonable charge. Inspection of the Company books
and records by the office or agency administering the securities laws of a
jurisdiction shall be provided upon reasonable notice and during normal
business hours.
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Section 8.66.5 Access to Stockholder List.
An alphabetical list of the names, addresses and telephone numbers of the
Stockholders of the Company, along with the number of Shares held by each of
them (the "Stockholder List"), shall be maintained as part of the books and
records of the Company and shall be available for inspection by any Stockholder
or the Stockholder's designated agent at the home office of the Company upon
the request of the Stockholder. The Stockholder List shall be updated at least
quarterly to reflect changes in the information contained therein and a copy of
such list shall be mailed to any Stockholder so requesting within ten (10) days
of the request. The Company may impose a reasonable charge for expenses
incurred in reproduction pursuant to the Stockholder request. A Stockholder may
request a copy of the Stockholder List in connection with matters relating to
Stockholders' voting rights, and the exercise of Stockholder rights under
federal proxy laws. The Company may require the Stockholder requesting the
Stockholder List to represent that the list is not requested for a commercial
purpose unrelated to the Stockholder's interest in the Company. The Company may
impose a reasonable charge for expenses incurred in reproducing such
Stockholder List. The Stockholder List may not be used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or mail a
copy of the Stockholder List as requested, the Advisor and the Directors shall
be liable to any Stockholder requesting the list for the costs, including
attorneys' fees, incurred by that Stockholder for compelling the production of
the Stockholder List, and for actual damages suffered by any Stockholder by
reason of such refusal or neglect. It shall be a defense that the actual
purpose and reason for the requests for inspection or for a copy of the
Stockholder List is to secure such list of Stockholders or other information
for the purpose of selling such list or copies thereof, or of using the same
for a commercial purpose other than in the interest of the applicant as a
Stockholder relative to the affairs of the Company. The remedies provided
hereunder to Stockholders requesting copies of the Stockholder List are in
addition, to and shall not in any way limit, other remedies available to
Stockholders under federal law, or the laws of any state.
6.6 Reports.
The Directors, including the Independent Directors, shall take reasonable
steps to insure that the Company shall cause to be prepared and mailed or
delivered to each Stockholder as of a record date after the end of the fiscal
year and each holder of other publicly held securities of the Company within
one hundred twenty (120) days after the end of the fiscal year to which it
relates an annual report for each fiscal year in accordance with the
requirements of the Securities and Exchange Commission and the New York Stock
Exchange or other national securities exchange on which the Company's
Securities are listed.
ending after the initial public offering of its securities which shall
include: (i) financial statements prepared in accordance with generally
accepted accounting principles which are audited and reported on by independent
certified public accountants; (ii) the ratio of the costs of raising capital
during the period to the capital raised; (iii) the aggregate amount of advisory
fees and the aggregate amount of other fees paid to the Advisor and any
Affiliate of the Advisor by the Company and including fees or changes paid to
the Advisor and any Affiliate of the Advisor by third parties doing business
with the Company; (iv) the Operating Expenses of the Company, stated as a
percentage of Average Invested Assets and as a percentage of its Net Income;
(v) a report from the Independent Directors that the policies being followed by
the Company are in the best interests of its Stockholders and the basis for
such determination; (vi) separately stated, full disclosure of all material
terms, factors, and circumstances surrounding any and all transactions
involving the Company, Directors, Advisors and any Affiliate thereof occurring
in the year for which the annual report is made; and (vii) Dividends to the
Stockholders for the period, identifying the source of such Dividends, and if
such information is not available at the time of the distribution, a written
explanation of the relevant circumstances will accompany the Dividends (with
the statement as to the source of Dividends to be sent to Stockholders not
later than sixty (60) days after the end of the fiscal year in which the
distribution was made). Independent Directors shall be specifically charged
with a duty to examine and comment in the report on the fairness of such
transactions.
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ARTICLE VII:
LIABILITY; OF STOCKHOLDERS, DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS;
TRANSACTIONS BETWEEN AFFILIATES AND THE COMPANY
Section 9.17.1 Limitation of Stockholder Liability.
No Stockholder shall be liable for any debt, claim, demand, judgment or
obligation of any kind of, against or with respect to the Company by reason of
his being a Stockholder, nor shall any Stockholder be subject to any personal
liability whatsoever, in tort, contract or otherwise, to any Person in
connection with the Company Property or the affairs of the Company by reason of
his being a Stockholder. The Company shall include a clause in its contracts
which provides that Stockholders shall not be personally liable for obligations
entered into on behalf of the Company.
7.2 Exculpation.
To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers, no director or officer
of the Company shall be liable to the Company or any of the Stockholders for
money damages. Neither the amendment nor repeal of this Section 7.2, nor the
adoption or amendment of any provision of these Articles of Incorporation
inconsistent with this Section 7.2, shall apply to or affect in any respect the
applicability of the preceding sentence with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
1.27.3 Indemnification Limitation of Liability and Indemnification.
------------------------------------------------
Each person who is or was or who agrees to become a director or officer of
the Company, or each person who, while a director of the Company, is or was
serving or who agrees to serve, at the request of the Company, as a director,
officer, partner, joint venture, employee or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
(including the heirs, executor, administrators or estate of such person), shall
be indemnified by the Company, and shall be entitled to have paid on his behalf
or be reimbursed for reasonable expenses in advance of final disposition of a
proceeding, in accordance with the Bylaws of the Company, to the full extent
permitted from time to time by the Maryland General Corporation Law as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment) or any other applicable laws presently or hereafter in effect.
The Company shall have the power, with the approval of the Board of Directors,
to provide such indemnification and advancement of expenses to any employee or
agent of the Company, in accordance with the Bylaws of the Company. Without
limiting the generality or the effect of the foregoing, the Company may enter
into one or more agreements with any person which provide for indemnification
greater or different than that provided in this Article VII.Any amendment or
repeal of this Article VII shall not adversely affect any right or protection
existing hereunder immediately prior to such amendment or repeal.
(i) The Company shall indemnify and hold harmless a present or former
Director, officer, Advisor, or Affiliate and may indemnify and hold
harmless a present or former employee or agent of the Company (the
"Indemnitee") against any or all losses or liabilities reasonably incurred
by the Indemnitee in connection with or by reason of any act or omission
performed or omitted to be performed on behalf of the Company while a
Director, officer, Advisor, Affiliate, employee, or agent and in such
capacity, provided, that the Indemnitee has determined, in good faith, that
the act or omission which caused the loss or liability was in the best
interests of the Company. The Company shall not indemnify or hold harmless
the Indemnitee if one or more of the following is applicable: (i) the loss
or liability was the result of negligence or misconduct, or if the
Indemnitee is an Independent Director, the loss or liability was the result
of gross negligence or willful misconduct, (ii) the act or omission was
material to the loss or
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liability and was committed in bad faith or was the result of active or
deliberate dishonesty, (iii) the Indemnitee actually received an improper
personal benefit in money, property, or services, (iv) in the case of any
criminal proceeding, the Indemnitee had reasonable cause to believe that the
act or omission was unlawful, or (v) in a proceeding by or in the right of
the Company, the Indemnitee shall have been adjudged to be liable to the
Company.
(ii) The Company shall not provide indemnification for any loss or
liability arising from an alleged violation of federal or state securities
laws unless one or more of the following conditions are met: (i) there has
been a successful adjudication on the merits of each count involving
alleged securities law violations as to the Indemnitee, (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the Indemnitee; or (iii) a court of competent
jurisdiction approves a settlement of the claims against the Indemnitee and
finds that indemnification of the settlement and the related costs should
be made, and the court considering the request for indemnification has been
advised of the position of the Securities and Exchange Commission and of
the published position of any state securities regulatory authority in
which securities of the Company were offered or sold as to indemnification
for violations of securities laws.
(iii) The Directors may take such action as is necessary to carry out
this Section 9.2 and are expressly empowered to adopt, approve and amend
from time to time Bylaws, resolutions or contracts implementing such
provisions. No amendment of these Articles of Incorporation or repeal of
any of its provisions shall limit or eliminate the right of indemnification
provided hereunder with respect to acts or omissions occurring prior to
such amendment or repeal.
7.3Payment of Expenses.
The Company shall pay or reimburse reasonable expenses incurred by a present
or former Director, officer, Advisor, or Affiliate and may pay or reimburse
reasonable expenses incurred by any other Indemnitee in advance of final
disposition of a proceeding if all of the following are satisfied: (i) the
Indemnitee was made a party to the proceeding by reason of his service as a
Director, officer, Advisor, Affiliate, employee or agent of the Company, (ii)
the Indemnitee provides the Company with written affirmation of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by Section 9.2 hereof, (iii) the Indemnitee provides
the Company with a written agreement to repay the amount paid or reimbursed by
the Company, together with the applicable legal rate of interest thereon, if it
is ultimately determined that the Indemnitee did not comply with the requisite
standard of conduct, and (iv) the legal proceeding was initiated by a third
party who is not a Stockholder or, if by a Stockholder of the Company acting in
his or her capacity as such, a court of competent jurisdiction approves such
advancement. Any indemnification payment or reimbursement of expenses will be
furnished in accordance with the procedures in Section 2-418 of the Maryland
General Corporation Law and may be paid only out of Net Assets of the Company,
and no portion may be receivable from Stockholders.
Section 9.47.4 Express Exculpatory Clauses In Instruments.
Neither the Stockholders nor the Directors, officers, employees or agents of
the Company shall be liable under any written instrument creating an obligation
of the Company by reason of their being Stockholders, Directors, officers,
employees or agents of the Company, and all Persons shall look solely to the
Company Property for the payment of any claim under or for the performance of
that instrument. The omission of the foregoing exculpatory language from any
instrument shall not affect the validity or enforceability of such instrument
and shall not render any Stockholder, Director, officer, employee or agent
liable thereunder to any third party, nor shall the Directors or any officer,
employee or agent of the Company be liable to anyone as a result of such
omission.
B-37
<PAGE>
1.57.5 Transactions with Affiliates.
The Company may shall not engage in transactions with any Affiliates, ,
except to the extent that each such transaction has, after disclosure of such
affiliation, been approved or ratified by the affirmative vote of a majority of
the Directors (including a majority of the Independent Directors) not
Affiliated with the person who is party to the transaction and:
(i) The transaction is fair and reasonable to the Company and its
Stockholders.
(ii) The terms of such transaction are at least as favorable as the
terms of any comparable transactions made on an arms-length basis and known
to the Directors.
(iii) The total consideration is not in excess of the appraised value
of the property being acquired, if an acquisition is involved.
(iv) Payments to the Advisor, its Affiliates and the Directors for
services rendered in a capacity other than that as Advisor or Director may
only be made upon a determination that:
(a) The compensation is not in excess of their compensation paid
for any comparable services; and
(b) The compensation is not greater than the charges for comparable
services available from others who are competent and not Affiliated
with any of the parties involved.
Transactions between the Company and its Affiliates are further subject to any
express restrictions in these Articles of Incorporation (including Article IV
and Section 5.6 7.7) or adopted by the Directors in the Bylaws or by
resolution, and further subject to the disclosure and ratification requirements
of MGCL (S) 2-419 and other applicable law.
ARTICLE X:ARTICLE VIII:
AMENDMENT; REORGANIZATION; MERGER, ETC.
Section 10.18.1 Amendment.
(i) These Articles of Incorporation may be amended, without the necessity
for concurrence by the Directors, by the affirmative vote of the holders of not
less than a majority of the Shares then outstanding and entitled to vote
thereon, except that (1) no amendment may be made which would change any rights
with respect to any outstanding class of securities, by reducing the amount
payable thereon upon liquidation, or by diminishing or eliminating any voting
rights pertaining thereto; and (2) Section 8.210.2 hereof and this Section
8.110.1 shall not be amended (or any other provision of these Articles of
Incorporation be amended or any provision of these Articles of Incorporation be
added that would have the effect of amending such sections), without the
affirmative vote of the holders of two-thirds ( 2/3) of the Shares then
outstanding and entitled to vote thereon.
(ii) The Directors, by a two-thirds ( 2/3) vote, may amend provisions of
these Articles of Incorporation from time to time as necessary to enable the
Company to qualify as a real estate investment trust under the REIT Provisions
of the Code. With the exception of the foregoing, the Directors may not amend
these Articles of Incorporation.
(iii) An amendment to these Articles of Incorporation shall become
effective as provided in Section 10.512.5.
(iv) These Articles of Incorporation may not be amended except as provided
in this Section 8.110.1.
B-38
<PAGE>
Section 10.28.2 Reorganization.
Subject to the provisions of any class or series of Shares at the time
outstanding, the Directors shall have the power (i) to cause the organization
of a corporation, association, trust or other organization to take over the
Company Property and to carry on the affairs of the Company, or (ii) merge the
Company into, or sell, convey and transfer the Company Property to any such
corporation, association, trust or organization in exchange for Securities
thereof or beneficial interests therein, and the assumption by the transferee
of the liabilities of the Company, and upon the occurrence of (i) or (ii) above
terminate the Company and deliver such Securities or beneficial interests
ratably among the Stockholders according to the respective rights of the class
or series of Shares held by them; provided, however, that any such action shall
have been approved, at a meeting of the Stockholders called for that purpose,
by the affirmative vote of the holders of not less than a majority of the
Shares then outstanding and entitled to vote thereon.
Section 10.38.3 Merger, Consolidation or Sale of Company Property.
Subject to the provisions of any class or series of Shares at the time
outstanding, the Directors shall have the power to (i) merge the Company into
another entity, (ii) consolidate the Company with one (1) or more other
entities into a new entity; (iii) sell or otherwise dispose of all or
substantially all of the Company Property; or (iv) dissolve or liquidate the
Company, other than before the initial investment in Company Property;
provided, however, that such action shall have been approved, at a meeting of
the Stockholders called for that purpose, by the affirmative vote of the
holders of not less than a majority of the Shares then outstanding and entitled
to vote thereon. Any such transaction involving an Affiliate of the Company or
the Advisor also must be approved by a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in such
transaction as fair and reasonable to the Company and on terms and conditions
not less favorable to the Company than those available from unaffiliated third
parties.
In connection with any proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all
Properties shall be obtained from a competent independent appraiser. The
Properties shall be appraised on a consistent basis, and the appraisal shall be
based on the evaluation of all relevant information and shall indicate the
value of the Properties as of a date immediately prior to the announcement of
the proposed Roll-Up Transaction. The appraisal shall assume an orderly
liquidation of Properties over a 12-month period. The terms of the engagement
of the independent appraiser shall clearly state that the engagement is for the
benefit of the Company and the Stockholders. A summary of the appraisal,
indicating all material assumptions underlying the appraisal, shall be included
in a report to Stockholders in connection with a proposed Roll-Up Transaction.
In connection with a proposed Roll-Up Transaction which has not been approved
by vote of at least two-thirds (2/3) of the Stockholders, the person sponsoring
the Roll-Up Transaction shall offer to Stockholders who vote against the
proposed Roll-Up Transaction the choice of:
(i) accepting the securities of a Roll-Up Entity offered in the
proposed Roll-Up Transaction; or
(ii) one of the following:
(a) remaining Stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(b) receiving cash in an amount equal to the Stockholder's pro rata
share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(iii) which would result in the Stockholders having democracy rights
in a Roll-Up Entity that are less than the rights provided for in Sections
6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 7.1 8.1, 8.2, 8.4, 8.5, 8.6 and 9.1 of
these Articles of Incorporation;
B-39
<PAGE>
(iv) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the minimum
extent necessary to pre serve the tax status of the Roll-Up Entity), or
which would limit the ability of an investor to exercise the voting rights
of its Securities of the Roll-Up Entity on the basis of the number of
Shares held by that investor;
(v) in which investor's rights to access of records of the Roll-Up
Entity will be less than those described in Sections 6.4 and 6.5 8.5 and
8.6 hereof; or
(vi) in which any of the costs of the Roll-Up Transaction would be
borne by the Company if the Roll-Up Transaction is not approved by the
Stockholders.
ARTICLE XI:ARTICLE IX:
DURATION OF COMPANY
Section 11.19.1 Perpetual Existence.
The duration of the Company is perpetual. The Company automatically will
terminate and dissolve on December 31, 2005, will undertake orderly liquidation
and Sales of Company Properties and Secured Equipment Leases, and will
distribute any Net Sales Proceeds to Stockholders, unless Listing occurs, in
which event the Company shall continue perpetually unless dissolved pursuant to
the provisions contained herein or pursuant to any applicable provision of the
MGCL.
Dissolution of the Company by Stockholder Vote.
The Company may be terminated at any time, without the necessity for
concurrence by the Board of Directors, by the vote or written consent of a
majority of the outstanding Equity Shares.
ARTICLE XII:ARTICLE X:
MISCELLANEOUS
Section 12.110.1 Governing Law.
These Articles of Incorporation have been approved by the Directors
executing the Articles of Amendment in which they are included are executed by
the undersigned Directors and delivered in the State of Maryland with reference
to the laws thereof, and the rights of all parties and the validity,
construction and effect of every provision hereof shall be subject to and
construed according to the laws of the State of Maryland without regard to
conflicts of laws provisions thereof.
Section 12.210.2 Reliance by Third Parties.
Any certificate shall be final and conclusive as to any Persons persons
dealing with the Company if executed by an individual who, according to the
records of the Company or of any recording office in which these Articles of
Incorporation may be recorded, appears to be the Secretary or an Assistant
Secretary of the Company or a Director, and if certifying to: (i) the number or
identity of Directors, officers of the Company or Stockholders; (ii) the due
authorization of the execution of any document; (iii) the action or vote taken,
and the existence of a quorum, at a meeting of the Directors or Stockholders;
(iv) a copy of the Articles of Incorporation or of the Bylaws as a true and
complete copy as then in force; (v) an amendment to these Articles of
Incorporation; (vi) the dissolution of the Company; or (vii) the existence of
any fact or facts which relate to the affairs of the Company. No purchaser,
lender, transfer agent or other Person person shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made on
behalf of the Company by the Directors or by any duly authorized officer,
employee or agent of the Company.
B-40
<PAGE>
Section 12.310.3 Provisions in Conflict with Law or Regulations.
(i) The provisions of these Articles of Incorporation are severable, and if
the Directors shall determine that any one or more of such provisions are in
conflict with the REIT Provisions of the Code, or other applicable federal or
state laws, the conflicting provisions shall be deemed never to have
constituted a part of these Articles of Incorporation, even with out any
amendment of these Articles of Incorporation pursuant to Section 8.110.1
hereof; provided, however, that such determination by the Directors shall not
affect or impair any of the remaining provisions of these Articles of
Incorporation or render invalid or improper any action taken or omitted prior
to such determination. No Director shall be liable for making or failing to
make such a determination.
(ii) If any provision of these Articles of Incorporation shall be held
invalid or unenforceable in any jurisdiction, such holding shall not in any
manner affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of these Articles of Incorporation in any
jurisdiction.
Section 12.410.4 Construction.
In these Articles of Incorporation, unless the context otherwise requires,
words used in the singular or in the plural include both the plural and
singular and words denoting any gender include both genders. The title and
headings of different parts are inserted for convenience and shall not affect
the meaning, construction or effect of these Articles of Incorporation. In
defining or interpreting the powers and duties of the Company and its Directors
and officers, reference may be made, to the extent appropriate, to the Code and
to Titles 1 through 3 of the Corporations and Associations Article of the
Annotated Code of Maryland, referred to herein as the "MGCL."
Section 12.510.5 Recordation.
These Articles of Incorporation and any amendment hereto shall be filed for
record with the State Department of Assessments and Taxation of Maryland and
may also be filed or recorded in such other places as the Directors deem
appropriate, but failure to file for record these Articles of Incorporation or
any amendment hereto in any office other than in the State of Maryland shall
not affect or impair the validity or effectiveness of these Articles of
Incorporation or any amendment hereto. A restated Articles of Incorporation
shall, upon filing, be conclusive evidence of all amendments contained therein
and may thereafter be referred to in lieu of the original Articles of
Incorporation Declaration of Trust and the various amendments thereto.
* * * * * * * * * *
B-41
<PAGE>
Exhibit C
INFORMATION MEMORANDUM
Attachment to Proxy Statement
for the Special Meeting of Stockholders of
CNL American Properties Fund, Inc.
to be held on , 1999
This Information Memorandum is being furnished to the holders of shares of
common stock, par value $0.01 per share, of CNL American Properties Fund, Inc.,
or APF, a Maryland corporation, as an attachment to the Proxy Statement for the
Special Meeting of such holders to be held on , 1999. NO VOTE OR
OTHER ACTION OF THE APF STOCKHOLDERS IS REQUIRED WITH RESPECT TO THIS
INFORMATION MEMORANDUM. WE ARE REQUESTING YOUR PROXY SOLELY IN CONNECTION WITH
THE MATTERS DESCRIBED IN THE PROXY STATEMENT TO WHICH THIS INFORMATION
MEMORANDUM IS ATTACHED.
This Information Memorandum describes certain acquisitions that APF intends
to complete in order to increase stockholder value. Upon consummation of such
acquisitions, APF intends to list its common stock, the APF Shares, for trading
on the New York Stock Exchange, or NYSE, in order to provide liquidity and a
trading market for them. At the Special Meeting, the APF stockholders will be
asked to consider and vote upon a proposal to approve an amendment and
restatement of APF's Articles of Incorporation, or the Restated Articles, to
facilitate the consummation of the acquisitions and to modify APF's existing
Articles of Incorporation to provide APF with the greater degree of operational
flexibility that is characteristic of publicly-traded real estate investment
trusts, or REITs.
As a result of the acquisitions, APF will become a full-service REIT which
has the ability to offer to prospective restaurant operators or owners a
complete range of restaurant development and financing options. The
acquisitions consist of the following:
. Acquisition of Advisor. APF will become internally advised and will
acquire complete acquisition, development and in-house management
functions by acquiring its external Advisor, CNL Fund Advisors, Inc.
Because APF has had no employees since its inception, the Advisor has
provided these functions on behalf of APF and has been responsible for
the day-to-day operations of APF, including raising capital, investment
analysis, acquisitions, due diligence, asset management and accounting
services. The acquisition of the Advisor also will provide APF with
restaurant development capabilities, including site selection,
construction management and build-to-suit development.
. Acquisition of CNL Restaurant Financial Services Group. To increase its
financing capabilities and expand its mortgage loan portfolio, APF will
acquire the CNL Restaurant Financial Services Group, which consists of
CNL Financial Corp. and CNL Financial Services, Inc., and collectively
with the Advisor, are referred to as the CNL Restaurant Businesses. The
CNL Restaurant Financial Services Group makes and services mortgage
loans (and, as described below, "securitizes" a portion of such loans)
to operators of national and regional restaurant chains comparable to
the restaurant chain operators that currently are tenants of APF.
. Acquisition of Income Funds. To increase the size of its restaurant
property portfolio, APF will seek to acquire CNL Income Funds I through
XVI, which are limited partnerships that owned, as of March 31, 1999 and
in the aggregate, 574 restaurant properties similar to the types of
restaurant properties in which APF invests. If APF acquires the Advisor,
the CNL Restaurant Financial Services Group and all of the Income Funds,
it expects to have total assets of approximately $1.5 billion at the
time those acquisitions are consummated and it will own or hold a
mortgage interest in more than 1,600 restaurant properties, making APF
one of the largest triple-net lease REITs in the United States.
The terms of the acquisitions and the background of and reasons for them are
discussed below.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Description of the Acquisitions......................................... C-2
Risk Factors and Benefits to the Principals............................. C-11
Summary Financial Information........................................... C-16
Background of and Reasons for the Acquisitions.......................... C-32
Selected Historical Financial Data of APF............................... C-54
Management's Discussion and Analysis of Financial Condition and Results
of Operations of APF................................................... C-55
APF's Business and the Restaurant Properties............................ C-63
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Income Funds...................................... C-78
Business of the Income Funds............................................ C-229
Common Stock Ownership After the Acquisitions........................... C-239
Additional Information.................................................. C-239
</TABLE>
C-1
<PAGE>
DESCRIPTION OF THE ACQUISITIONS
General
APF has entered into merger agreements with the stockholders of each of the
Advisor and the CNL Restaurant Financial Services Group. APF has also entered
into merger agreements with the General Partners of each of the Income Funds,
which are referred to as the Merger Agreements. The Advisor and the CNL
Restaurant Financial Services Group will each be merged into a separate newly-
formed, wholly-owned subsidiary of APF and the Income Funds will be merged with
and into CNL APF Partners, L.P., an existing, wholly-owned subsidiary of APF
through which APF will conduct its business after such acquisitions have been
consummated. The Merger Agreements were negotiated and executed following the
recommendation of a Special Committee of APF's Board of Directors, which is
comprised of the three independent members of APF's Board, and the unanimous
vote in favor of the acquisitions of the members of the full Board. See
"BACKGROUND OF AND REASONS FOR THE ACQUISITIONS -- Chronology of the
Acquisitions."
The merger agreements provide that the purchase price payable by APF to the
stockholders of the CNL Restaurant Businesses will consist of 6,150,000 APF
Shares (with the Board having allocated 3,800,000 of such APF Shares for the
acquisition of the Advisor and 2,350,000 of such APF Shares for the acquisition
of the CNL Restaurant Financial Services Group) and that if all of the Income
Funds are acquired, up to an aggregate of 27,343,243 APF Shares will be issued
to the partners of the Income Funds (before the payment by the Income Funds of
certain acquisition expenses). Because the APF Shares are not listed at this
time, the value of an APF Share is uncertain. For purposes of the acquisitions,
the Board assigned the APF Shares a value of $20.00 per share, which, after
adjustment for the one-for-two reverse stock split, is the price at which APF
sold APF Shares in three previous public offerings, the most recent of which
was completed in December 1998. Based on that value, APF will pay $123 million
for the CNL Restaurant Businesses (with the Board having allocated $76 million
of that amount for the acquisition of the Advisor and $47 million for the
acquisition of CNL Restaurant Financial Services Group) and, if all the Income
Funds are acquired, up to an aggregate of $547 million for the Income Funds
(before the payment by the Income Funds of certain acquisition expenses). APF
has obtained two separate fairness opinions from Merrill Lynch & Co., an
independent investment banking firm, in which Merrill Lynch opined that the
aggregate consideration to be paid by APF for the CNL Restaurant Businesses and
for the Income Funds, respectively, is fair to APF from a financial point of
view. See "BACKGROUND OF AND REASONS FOR THE ACQUISITIONS-- Fairness Opinions
of Merrill Lynch to the Special Committee with respect to the CNL Restaurant
Businesses and the Income Funds" and the full text of the fairness opinions,
which are attached as Exhibit D-1 and Exhibit D-2, respectively, to the Proxy
Statement.
APF plans to complete the acquisition of the CNL Restaurant Businesses soon
as practicable. Because APF already has a sufficient number of APF Shares
available to consummate these acquisitions, they may be completed before the
Restated Articles are approved. The acquisitions of the Income Funds, on the
other hand, are subject to approval of the increase in the authorized number of
APF Shares by the APF stockholders because APF does not currently have a
sufficient number of authorized shares to complete those acquisitions. Further,
the Income Fund acquisitions are subject to the approval by the Limited
Partners holding in excess of 50% of the outstanding units of limited
partnership interest of each Income Fund. A special meeting of the Limited
Partners of the Income Funds is scheduled to be held on 1999 for the
purpose of voting on the Income Fund acquisitions. If the increase in the
authorized number of APF Shares is approved, the acquisition of the Income
Funds will occur as soon as practicable following the approval of such
acquisitions by the Limited Partners of the Income Funds. It is expected that
the Income Fund acquisitions will be consummated in the fourth quarter of 1999.
In no event will such acquisitions be consummated later than March 31, 2000.
Acquisition of the Advisor
APF will become internally advised and acquire complete acquisition,
development and in-house asset management functions by acquiring the Advisor.
Because APF has had no employees since its inception, the Advisor has provided
these functions on behalf of APF and it has been responsible for the day-to-day
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<PAGE>
operations of APF, including raising capital, investment analysis,
acquisitions, due diligence, asset management and accounting services. In June
1998, the Advisor acquired CNL Restaurant Development, Inc. As a result of that
acquisition, the Advisor now offers site selection and construction management
and build-to-suit development services that had previously been performed by
CNL Restaurant Development, Inc. As of March 31, 1999, the Advisor was
overseeing 75 restaurant development projects.
The Advisor is a majority owned subsidiary of CNL Group, Inc., a diversified
real estate company wholly-owned by James M. Seneff, Jr. and his wife. The
seven executive officers of APF are also executive officers of the Advisor, and
Mr. Seneff serves as Chairman of the Board of Directors and Chief Executive
Officer of CNL Group, Inc., APF, the Advisor and other CNL affiliates. The
Advisor has developed extensive experience and long-term relationships
throughout the restaurant industry, including but not limited to the
relationships the Advisor has developed with the restaurant chains with which
APF has relationships. APF believes that the Advisor's experience and
relationships benefit APF in selecting, acquiring and managing its properties,
thereby providing APF with a competitive advantage in the management and
operation of its real estate assets and in the identification of attractive
investments. The Advisor's principal executive offices are in the same location
as APF's: 400 East South Street, Orlando, Florida 32801, telephone number (407)
650-1000.
The Advisor currently is entitled to various fees for providing services to
APF. Upon the acquisition of the Advisor, the operations of the Advisor will
become part of the business of APF and, accordingly, APF will cease to pay such
fees and other fees that APF pays to affiliates of the Advisor. APF believes
that, as a result, it will experience long-term cost savings by acquiring the
Advisor. See "BACKGROUND OF AND REASONS FOR THE ACQUISITIONS -- Reasons for
Acquiring the CNL Restaurant Businesses."
Fees payable to the Advisor and other fees payable to affiliates of the
Advisor, all of which APF will cease to pay once it acquires the Advisor,
consist generally of the following:
(a) a monthly asset management fee equal to one-twelfth of .60% of (i) the
amount invested in properties wholly-owned by APF, determined on the
basis of cost, plus, in the case of properties owned by a joint venture
or partnership, the portion of the cost of such properties paid by APF,
exclusive of acquisition fees and expenses, which is referred to as the
Real Estate Asset Value, and (ii) the outstanding principal amount of
APF's mortgage loans as of the end of the preceding month;
(b) subject to certain limitations, reimbursement of operating expenses;
(c) an acquisition fee for the acquisition of properties and funding of
mortgage loans in an amount equal to 4.5% of the total amount raised
from the sale of APF Shares or from borrowings under APF's line of
credit after all net offering proceeds have been invested;
(d) subject to approval of the Board of Directors, additional acquisition,
development or construction fees that are payable to affiliates of the
Advisor in connection with the financing, development, construction and
renovation of properties;
(e) an acquisition expense reimbursement for costs incurred by the Advisor
on behalf of APF in site selection and acquisition activities,
including travel and related items, that, when combined with
acquisition fees payable to the Advisor and its affiliates, shall not,
without the approval of the Board of Directors, exceed 6% of the Real
Estate Asset Value of a property or, in the case of a mortgage loan, 6%
of the funds advanced;
(f) a deferred subordinated real estate disposition fee, payable upon sale
of one or more properties, equal to the lesser of (i) one half of a
competitive real estate commission, which is a commission that is
reasonable, customary and competitive in light of the size, type and
location of the property, and (ii) 3% of the sales price of the
property;
(g) a deferred, subordinated incentive fee payable upon the listing of the
APF Shares on a national securities exchange or over-the-counter market
or the sale of assets of APF, subject to the receipt by the APF
stockholders of total distributions in excess of certain minimum
levels;
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<PAGE>
(h) a secured equipment lease servicing fee equal to 2% of the purchase
price of equipment subject to each secured equipment lease and
reimbursement of expenses incurred in obtaining such leases up to a
maximum of 0.5% of the purchase price of the equipment subject to each
lease; and
(i) an annual soliciting dealer servicing fee equal to 0.2% of APF's
"invested capital", which generally is the amount of cash paid for all
APF Shares sold reduced by certain prior distributions with respect to
such shares, on December 31 of each year, which fee is payable until
the listing of the APF Shares on a national securities exchange or
over-the-counter market or the sale of assets of APF.
For the years ended December 31, 1998, 1997 and 1996, the Advisor fees
amounted to $24,172,688, $13,601,242 and $6,155,180, respectively. The Advisor
pays all of its own expenses, including salaries, wages, payroll taxes, costs
of employee benefit plans and charges for incidental help, incurred in
connection with acquisition activities under the advisory agreement between APF
and the Advisor. The Advisor also pays its own accounting fees and related
expenses, legal fees, insurance, rent, telephone, utilities and certain travel
expenses of its officers and employees. All of these expenses will be borne
directly by APF after the consummation of the acquisition of the CNL Restaurant
Businesses.
The advisory agreement is subject to annual renewal by APF and the Advisor.
APF renewed the advisory agreement effective April 1999 for the period ending
April 2000. Because APF and the Advisor are under common control, the decision-
making process with respect to such renewal has not necessarily proceeded on
the same arm's-length basis it would have if APF and the Advisor were
unaffiliated entities. Nevertheless, APF believes that the fees paid to the
Advisor are no less favorable than the fees that would be paid to an
unaffiliated third party advisor. In addition, APF believes that no other
advisory company could provide the same level of experience and expertise as
the Advisor, and therefore has not actively pursued discussions with any other
advisory companies prior to renewing the advisory agreement.
Acquisition of CNL Restaurant Financial Services Group
CNL Financial Corp. and CNL Financial Services, Inc. are Florida
corporations, each owned 90% by CNL Group, Inc. and its employees and
affiliates and 10% by Five Arrows Realty Securities L.L.C., a Delaware limited
liability company that is not affiliated with CNL Group, Inc. Their principal
executive offices are in the same location as APF's: 400 East South Street,
Orlando, Florida 32801, telephone number (407) 650-1000.
Although APF has the ability to make mortgage loans subject to certain
restrictions under its existing Articles of Incorporation, which restrictions
are proposed to be eliminated under the Restated Articles as described in the
Proxy Statement, the acquisition of the CNL Restaurant Financial Services Group
will permit APF to expand its financing capabilities to include securitization
transactions, as described below. APF also will acquire the CNL Restaurant
Financial Services Group's existing mortgage loan portfolio, including the
servicing rights related to the portfolio, and will assume the warehouse lines
of credit used previously by them in providing such financial services. As of
March 31, 1999, the CNL Restaurant Financial Services Group had made $553
million in mortgage loans on 545 restaurant properties in 40 states and had
securitized approximately $269 million of the $553 million of originated
mortgage loans. Also as of that date, the CNL Restaurant Financial Services
Group had signed commitments for an additional $123 million in mortgage loans.
The CNL Restaurant Financial Services Group "securitizes" mortgage loans. A
mortgage loan securitization involves 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 makes loans and securitizes them by selling them to a special purpose
entity which issues certificates representing beneficial interests in the pool
of mortgage loans. The CNL Restaurant Financial Services Group receives from a
securitization: (1) the proceeds, less a placement fee and other offering
expenses, from the sale of the certificates, (2) income in the form of the
"spread" 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 have been securitized.
C-4
<PAGE>
The CNL Restaurant Financial Services Group usually will retain a subordinated
interest in the mortgage loans, which because it is subordinated, generally
will bear interest at a higher rate than the mortgage loans as a whole.
Further, by eliminating the securitized mortgage loans from its balance sheet,
the securitization transactions reduce the CNL Restaurant Financial Services
Group's equity requirements.
The following table shows certain information regarding mortgage loans made
by APF on restaurant properties in which APF owned an interest as of March 31,
1999 and assuming the acquisition of the CNL Restaurant Financial Services
Group as of that date, including the restaurant chain, the number of restaurant
properties subject to mortgage loans per restaurant chain, the aggregate
revenue per restaurant chain and the aggregate outstanding balance of mortgage
loans per chain.
<TABLE>
<CAPTION>
Annualized Percent of Aggregate Percent of
Number of Total Total Outstanding Outstanding
Restaurant Chain Properties Revenue Revenue Balance Balance
- ---------------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Applebee's.......... 61 $5,932,000 25.3% $ 73,177,000 27.5%
Taco Bell........... 67 4,158,000 17.7 46,438,000 17.5
T.G.I. Friday's..... 14 2,557,000 10.9 30,596,000 11.5
Burger King......... 36 2,530,000 10.8 28,833,000 10.8
Pizza Hut........... 46 1,743,000 7.4 16,321,000 6.1
Ruby Tuesday........ 19 1,302,000 5.5 15,200,000 5.7
Denny's............. 10 1,048,000 4.5 11,803,000 4.4
Fazoli's............ 7 625,000 2.7 6,964,000 2.6
Shoney's............ 7 610,000 2.6 6,105,000 2.3
KFC................. 7 585,000 2.5 6,762,000 2.6
Friendly's.......... 3 374,000 1.6 3,742,000 1.4
Houlihan's.......... 2 373,000 1.6 3,696,000 1.4
Golden Corral....... 2 348,000 1.5 3,830,000 1.4
Del Taco............ 4 304,000 1.3 3,240,000 1.2
Wendy's............. 4 302,000 1.3 1,878,000 0.7
Papa John's......... 15 268,000 1.1 3,078,000 1.2
Sam & Harry......... 3 175,000 0.7 1,575,000 0.6
Captain D's......... 2 115,000 0.5 1,324,000 0.5
Popeyes............. 2 71,000 0.3 792,000 0.3
Arby's.............. 1 57,000 0.2 744,000 0.3
--- ----------- ----- ------------ -----
Total............. 312 $23,477,000 100.0% $266,098,000 100.0%
=== =========== ===== ============ =====
</TABLE>
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<PAGE>
The following table shows, for restaurant properties in which APF owned an
interest, as of March 31, 1999 and assuming the acquisition of the CNL
Restaurant Financial Services Group as of that date, information by restaurant
chain for mortgage loans that the CNL Restaurant Financial Services Group has
securitized.
<TABLE>
<CAPTION>
Aggregate Percent of
Number of Outstanding Outstanding
Restaurant Chain Properties Balance(1) Balance
- ---------------- ---------- ------------ -----------
<S> <C> <C> <C>
T.G.I. Friday's............................ 35 $ 53,133,000 20.2%
Wendy's.................................... 50 47,552,000 18.1
Bennigan's................................. 22 36,208,000 13.8
Taco Bell.................................. 56 33,440,000 12.7
Burger King................................ 36 31,763,000 12.1
Ruby Tuesday............................... 13 17,124,000 6.5
Steak and Ale Restaurant................... 6 8,477,000 3.2
KFC........................................ 10 8,286,000 3.2
Applebee's................................. 4 5,897,000 2.2
Fazoli's................................... 5 5,138,000 2.0
Papa John's................................ 33 4,734,000 1.8
Sonny's Real Pit Bar-B-Q................... 8 4,162,000 1.6
Morton's of Chicago........................ 2 2,177,000 0.8
Denny's.................................... 2 1,582,000 0.6
Arby's..................................... 3 1,521,000 0.6
Del Taco................................... 2 1,010,000 0.4
Popeyes.................................... 1 660,000 0.2
--- ------------ -----
Total.................................... 288 $262,844,000 100.0%
=== ============ =====
</TABLE>
Acquisition of Income Funds
APF is seeking to increase its asset base by acquiring the Income Funds,
which as of March 31, 1999, owned in the aggregate, 574 restaurant properties,
which for the quarter ended March 31, 1999, had aggregate gross revenues of
approximately $11.0 million. Similar to APF, the Income Funds' restaurant
properties generally are leased on a triple-net basis to operators of national
and regional restaurant chains and managed by the Advisor. The Income Funds'
principal executive offices are in the same location as APF's: 400 East South
Street, Orlando, Florida 32801, telephone number (407) 650-1000. See "BUSINESS
OF THE INCOME FUNDS" for a discussion of the current business of the Income
Funds, the methods by which the Income Funds evaluate and acquire restaurant
properties and the terms upon which the Income Funds' restaurant properties are
leased.
The Income Funds were formed from 1985 to 1993 by affiliates of CNL Group,
Inc., an affiliate of APF. The Limited Partners of the Income Funds are the
individuals and entities who invested in the Income Funds. James M. Seneff,
Jr., APF's Chairman and Chief Executive Officer, Robert A. Bourne, APF's Vice
Chairman and Treasurer, and CNL Realty Corporation are the General Partners of
each of the Income Funds.
If all of the Income Funds are acquired by APF, and assuming that APF had
acquired all of the Income Funds as of March 31, 1999, APF would own and lease
on a triple-net basis, 1,087 restaurant properties. 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 percent leased as
of March 31, 1999. The average age of the buildings on restaurant properties in
the portfolio would be approximately 8.5 years. As a result, APF would become
one of the largest triple-net lease REITs in the United States. The following
table sets forth material restaurant property information for restaurant
properties owned as of March 31, 1999, assuming all of the Income Funds were
acquired on that date, with respect to significant restaurant chains operating
restaurant properties. The annualized revenue includes the straight-lining of
rental income in accordance with generally accepted accounting principles.
C-6
<PAGE>
<TABLE>
<CAPTION>
Total Number Average
of Age of Annualized Percent of
Restaurant Buildings Aggregate Total Total Rental
Restaurant Chain Properties (years) Rental Revenue Revenue
- ---------------- ------------ --------- --------------- ------------
<S> <C> <C> <C> <C>
Golden Corral.............. 102 5.7 $ 13,573,000 13.4%
Jack in the Box............ 104 4.6 10,049,000 9.9
Burger King................ 95 11.9 9,023,000 8.9
Denny's.................... 69 10.5 6,779,000 6.7
Hardee's................... 78 7.1 5,465,000 5.4
IHOP....................... 36 2.6 4,834,000 4.8
Bennigan's................. 23 15.2 4,421,000 4.3
Boston Market.............. 42 2.7 3,451,000 3.4
Steak and Ale Restaurant... 20 20.7 3,400,000 3.3
Shoney's................... 30 7.9 3,226,000 3.2
Arby's..................... 36 5.7 3,047,000 3.0
Darryl's................... 17 17.9 2,595,000 2.6
Long John Silver's......... 42 7.7 2,362,000 2.3
Applebee's................. 14 3.9 2,222,000 2.2
Wendy's.................... 25 8.4 2,194,000 2.2
Checkers................... 47 5.1 2,069,000 2.0
Chevy's Fresh Mex.......... 8 4.8 1,975,000 1.9
Pollo Tropical............. 11 4.7 1,780,000 1.7
Black-eyed Pea............. 27 4.6 1,723,000 1.7
Pizza Hut.................. 66 15.9 1,642,000 1.6
Ground Round............... 14 18.1 1,507,000 1.5
KFC........................ 18 10.1 1,293,000 1.3
Popeyes.................... 19 12.4 1,013,000 1.0
Other...................... 144 8.8 11,920,000 11.7
----- ------------ -----
Total.................... 1,087 $101,563,000 100.0%
===== ============ =====
</TABLE>
The tenants of two restaurant chains have filed voluntary petitions for
bankruptcy. In October 1998, tenants of 38 Boston Market restaurant properties
filed voluntary petitions for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. As of May 31, 1999, 12 of these restaurant properties remain
closed, one restaurant property has been sold, and APF continues to receive
lease payments on the remaining 25 restaurant properties. The tenant of 36 Long
John Silver's restaurant properties filed a voluntary petition for bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code. As of May 31, 1999, seven of
these restaurant properties remain closed, three restaurant properties have
been sold, and APF continues to receive lease payments on the remaining 26
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 and the acquisition of each Income Fund
must be approved by its Limited Partners, it is possible that APF will not
acquire all of the Income Funds. Consequently, after the acquisition of the
Income Funds, APF will not necessarily own all of the restaurant properties
listed above.
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<PAGE>
The table below lists (1) the Income Fund that APF is seeking to acquire,
(2) the number of APF Shares being offered to each Income Fund if it is
acquired, and (3) the estimated value (based on the assigned value of $20.00
per APF Share) of the APF Shares to be paid to each Income Fund. The estimated
value of the APF Shares being offered to each Income Fund reflects a reduction
in the number of APF Shares paid to that Income Fund by APF for that Income
Fund's allocable portion of the estimated expenses of the acquisition. The data
in these tables assumes that none of the Limited Partners has elected the notes
option described below.
<TABLE>
<CAPTION>
Estimated
Value of
Number of APF Shares
APF Shares after
Offered to Acquisition
Fund Fund Expenses
---- ---------- -----------
<S> <C> <C>
CNL Income Fund, Ltd............................... 578,880 $11,419,600
CNL Income Fund II, Ltd............................ 1,196,634 23,637,680
CNL Income Fund III, Ltd........................... 1,041,451 20,563,020
CNL Income Fund IV, Ltd............................ 1,334,008 26,336,160
CNL Income Fund V, Ltd............................. 1,024,516 20,250,020
CNL Income Fund VI, Ltd............................ 1,865,194 36,882,880
CNL Income Fund VII, Ltd........................... 1,601,186 31,633,720
CNL Income Fund VIII, Ltd.......................... 2,021,318 39,966,360
CNL Income Fund IX, Ltd............................ 1,850,049 36,563,980
CNL Income Fund X, Ltd............................. 2,121,622 41,951,440
CNL Income Fund XI, Ltd............................ 2,197,098 43,464,960
CNL Income Fund XII, Ltd........................... 2,384,248 47,166,960
CNL Income Fund XIII, Ltd.......................... 1,943,093 38,420,860
CNL Income Fund XIV, Ltd........................... 2,156,521 42,655,620
CNL Income Fund XV, Ltd............................ 1,866,851 36,917,020
CNL Income Fund XVI, Ltd........................... 2,160,474 42,736,480
</TABLE>
The Limited Partners of the Income Funds that are acquired will receive APF
Shares in exchange for their units of limited partnership interest unless they
affirmatively vote against the acquisition and elect to receive alternative
consideration consisting of 7.0% callable notes due 2004 in an amount
equal to 97% of such Limited Partner's portion of the APF Share consideration
that would otherwise have been paid to the Income Fund. The payment received by
the Limited Partners who elect the notes option will be equal to their portion
of the amount that their Income Fund would receive upon an orderly liquidation
of its restaurant properties over a 12-month period pursuant to the partnership
agreement governing their Income Fund, based upon a liquidation value appraisal
prepared by Valuation Associates. The number of APF Shares issued to a
particular Income Fund will be reduced to the extent its Limited Partners elect
the notes option.
The acquisition of each Income Fund is subject to the approval by the
holders of a majority of the units of limited partnership interest of such
Income Fund. APF anticipates that it will take between two and four months to
solicit the Limited Partners of the Income Funds, to obtain the necessary
approvals and to consummate the Income Fund acquisitions. It is expected that
the Income Fund acquisitions will be consummated in the fourth quarter of 1999.
In connection with the Income Fund acquisitions, James M. Seneff, Jr. and
Robert A. Bourne, together referred to as the Principals, will receive APF
Shares in exchange for their interests as General Partners in the acquired
Income Funds. See "RISK FACTORS AND BENEFITS TO THE PRINCIPALS -- Benefits to
the Principals Resulting from the Acquisitions."
Description of the Income Fund Merger Agreements
The following paragraphs summarize the material terms (other than those
described elsewhere in this Information Memorandum) of the Merger Agreements
between APF and the Income Funds for the acquisition
C-8
<PAGE>
of the Income Funds. Except for the particular contracting parties and the
consideration payable by APF, the Merger Agreements are substantially
identical. A copy of a form of Merger Agreement is attached as Exhibit E to the
Proxy Statement and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the form of Merger Agreement.
General. APF and CNL APF Partners, L.P., a wholly-owned subsidiary of APF
which is referred to as the Operating Partnership, have entered into the Merger
Agreements with the Income Funds, which agreements set forth the terms and
conditions, including requisite partner approvals, upon which the Operating
Partnership will acquire the Income Funds. Pursuant to and subject to the terms
and conditions of the Merger Agreements, the Operating Partnership will acquire
each Income Fund. In consideration therefor, each Limited Partner of each
Income Fund that is acquired will receive APF Shares in exchange for his or her
units of limited partnership interest, except that Limited Partners of Income
Funds that are acquired who affirmatively vote against the acquisition of their
Income Funds may elect the notes option in lieu of receiving APF Shares.
Closing. The Merger Agreements provide that the mergers will occur after all
of the conditions set forth in the Merger Agreements have been satisfied or
waived. It is expected that the closing of the merger of each Income Fund with
the Operating Partnership will occur in the fourth quarter of 1999. The General
Partners have required that the acquisitions of the Income Funds be consummated
no later than March 31, 2000.
Conduct of Business Prior to Closing. Each Income Fund and its General
Partners have agreed, among other things, that prior to its closing, each
Income Fund will not take certain actions without APF's written consent,
including but not limited to: (1) issuing new units of limited partnership
interest, (2) effecting any splits of such units, (3) adopting any amendment to
its partnership agreement, (4) incurring or guaranteeing indebtedness for
borrowed money, (5) mortgaging, pledging, selling or transferring any of its
material assets, or (6) engaging in any business which is materially different
from the business in which such Income Fund was engaged at the time the Merger
Agreement was executed.
Each Income Fund also has agreed that, prior to its closing, it (1) will
cause the tenants of its restaurant properties to maintain public liability and
casualty insurance, (2) will not sell its restaurant properties, (3) will not
place any encumbrances on its restaurant properties that would prevent the
merger from occurring, (4) will not incur material obligations or liabilities
other than in the ordinary course of business, and (5) will pay taxes and
assessments or cause such taxes and assessments to be paid if due prior to its
closing.
Conditions to Closing. The obligations of APF, the Operating Partnership,
each Income Fund and that Income Fund's General Partners to effect the merger
are subject to the fulfillment or waiver on or prior to each closing of certain
conditions, including: (1) the approval by the Limited Partners holding in
excess of 50% of the outstanding units of limited partnership interest of that
Income Fund, (2) the approval by the APF stockholders of the increase in the
authorized number of APF Shares, (3) the listing of the APF Shares on the NYSE
prior to or concurrently with the consummation of the Income Fund acquisitions
and (4) if fewer than all of the Income Funds approve the Income Fund
acquisitions, the receipt by the Special Committee of another fairness opinion
from Merrill Lynch stating that the aggregate consideration payable to the
Income Funds that approved the transaction is fair to APF from a financial
point of view. In addition, the obligations of APF and the Operating
Partnership to effect each merger are subject to the fulfillment or waiver at
or prior to each closing of certain additional conditions, including (1) that
the representations and warranties made by the relevant Income Fund and its
General Partners with respect to its business set forth in its respective
merger agreement are true and correct in all material respects as of the date
of such closing, (2) that APF has acquired the CNL Restaurant Businesses and
(3) that the Income Fund's estimated environmental liabilities be 10% or less
of the value of the APF Share consideration proposed to be paid to such Income
Fund by APF (based on the assigned value of $20.00 per APF Share).
Representations and Warranties. Each Income Fund and its General Partners
have represented and warranted in its Merger Agreement that, to their
respective knowledge, it has good and valid title to its respective restaurant
properties and will covenant to transfer such title to the Operating
Partnership at the time of its acquisition. Each Income Fund made various other
representations and warranties, including representations and warranties that
(1) it has caused and will cause all tenants of its restaurant properties to
C-9
<PAGE>
maintain public liability and casualty insurance, (2) that the leases at its
restaurant properties are in full force and effect, (3) that there are no
condemnation proceedings against its restaurant properties, and (4) that it has
not received notice of any material uncured violation of any applicable
governmental regulation or ordinance. Each Income Fund has made representations
and warranties as to (1) the amount of its outstanding indebtedness, (2) its
financial condition and liabilities, (3) the existence of material contracts
relating to its restaurant properties, and (4) the existence of pending or, to
the Income Fund's knowledge, threatened litigation affecting that Income Fund.
In addition, each Income Fund has represented and warranted that, to its
knowledge, (1) it and/or its tenants have the necessary permits for the
ownership and operation of its restaurant properties, (2) there is no claim for
a material delinquent tax obligation, (3) there are no material environmental
violations or liabilities with respect to its restaurant properties, (4) there
are no pending or, to their knowledge, threatened material proceedings alleging
environmental violations or liability with respect to its restaurant
properties, (5) the improvements on its restaurant properties are in good
condition in all material respects, and (6) there is no pending proceeding to
levy special assessments against its restaurant properties. The representations
and warranties in the Merger Agreements will survive for 18 months following
each closing. APF is not entitled to assert claims against any Income Fund or
its restaurant properties for a breach of any representations and warranties
made by that Income Fund unless and until the estimated damages from such
claims exceed 1% of the value, based on the assigned value of $20.00 per APF
Share, of the APF Shares paid to the Limited Partners of that Income Fund.
Expenses. APF will bear the transaction costs it incurs in connection with
the Income Fund acquisitions. The Income Funds that are acquired by APF will
bear their transaction costs in the form of a reduction in the number of APF
Shares they receive as consideration. The transaction costs incurred by the
Income Funds that are not acquired by APF will be borne by those Income Funds
and their General Partners.
Tax Consequences to APF of the Fund Acquisitions
APF will not recognize a gain or loss as a result of the Income Fund
acquisitions. APF will have a holding period in the restaurant properties that
it acquires from the Income Funds beginning on the date of the closing of the
Income Fund acquisitions. The basis of the restaurant properties owned by 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 Income Fund
acquisitions, 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 1060A
of the Internal Revenue Code of 1986, as amended. 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 Income Fund acquisitions. These factors
could result in an overall change, following the Income Fund acquisitions, in
the depreciation deductions attributable to the restaurant properties acquired
from the Income Funds following the Income Fund acquisitions.
Accounting Treatment
The acquisition of the CNL Restaurant Businesses and the Income Funds will
all be accounted for as purchases under generally accepted accounting
principles.
Regulatory Approvals
No federal or state regulatory requirements must be completed with or
approvals must be obtained in connection with the acquisition of the CNL
Restaurant Businesses and the Income Funds.
Listing of Shares; Public Offering
APF intends to provide liquidity and a trading market for the APF Shares by
listing the APF Shares for trading on the NYSE. APF will seek to have the
shares begin trading on the NYSE concurrently with the
C-10
<PAGE>
consummation of the Income Fund acquisitions. In an effort to obtain a greater
following by the investment banking analyst community, concurrently with or
shortly following the Income Fund acquisitions and the listing of the 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.
RISK FACTORS AND BENEFITS TO THE PRINCIPALS
There are various risks involved in the acquisition of the CNL Restaurant
Businesses and the Income Funds, including those described below. In addition
to the other information included in this Information Memorandum, you should
carefully review the following risk factors.
This Information Memorandum also contains forward-looking statements. Such
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Although APF believes that its expectations reflected in such forward-
looking statements are based on reasonable assumptions, such expectations may
not prove to be correct. Important factors could cause such actual results to
differ materially from the expectations reflected in these forward-looking
statements including those set forth below, as well as general economic,
business and market conditions, changes in federal and local laws and
regulations, costs or difficulties relating to the acquisitions and related
transactions and increased competitive pressures.
Risks Relating to and Resulting from the Acquisitions
The price per APF Share was determined by APF, and the trading price of the APF
Shares may decrease below such price 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 $20.00 per APF Share or
the historical per share book value of the assets of APF. In addition, the
existing APF stockholders have not had an active trading market in which they
could sell their APF Shares and any Limited Partners of the Income Funds who
become APF stockholders as a result of the Income Fund acquisitions will have
transformed their investment in non-tradable units of limited partnership
interest into an investment in freely tradable APF Shares. Consequently, some
of these stockholders may choose to sell their APF Shares upon listing on the
NYSE at a time when demand for APF Shares may be relatively low. The market
price of the APF Shares may be volatile after the acquisitions described herein
and the APF Shares could trade at amounts substantially less than $20.00 per
APF Share as a result of increased selling activity following issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
such acquisitions and the amount of distributions to be paid by APF.
APF may not be able to successfully integrate the Advisor into its business.
Upon completion of APF's acquisition of the Advisor, APF will become
responsible for the first time for its own day-to-day operations, including
raising capital, analyzing investments, making acquisitions, completing due
diligence, managing assets and accounting services. In addition, APF will
acquire the Advisor's restaurant development capabilities and will therefore
bear the risks associated with real estate development. There can be no
assurance that APF will be able to integrate the advisory and real estate
development functions into its business successfully. APF's overhead, on a
consolidated basis, will increase as a result of being self-administered and of
expanding its operations to include development services. If APF's existing or
prospective tenants decide to limit their expansion plans or elect not to use
APF's development services, APF may not be able to generate sufficient
additional revenues to offset the additional expenses of performing functions
formerly performed by the Advisor.
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
In its acquisition of the CNL Restaurant Businesses, APF will acquire the
CNL Restaurant Financial Services Group. 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.
C-11
<PAGE>
APF will be subject to risks inherent in the business of lending, such as
the risk of default of the borrower 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; APF's gains on any
completed securitizations may be overstated if prepayments or defaults are
greater than anticipated.
The CNL Restaurant Financial Services Group has previously "securitized" one
portfolio of mortgage loans by contributing them to a trust which 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. Upon the consummation of the acquisition of the CNL Restaurant
Financial Services Group, APF will oversee these lending and securitization
operations. APF may not 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 will be required to 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.
The retained subordinated interests and interest-only securities that APF will
hold in securitizations may not be recoverable under certain conditions.
Upon consummation of the acquisition of the CNL Restaurant Financial
Services Group APF's retained subordinated interests in securitizations and
interest-only securities may not be recoverable under certain conditions. In
connection with the origination of loans that are subsequently sold through
securitization transactions, APF may retain certain residual interests in cash
flows generated by the securitization including certain interest-only
certificates. Interest-only certificates represent amounts that are expected to
become available if the interest on the underlying mortgages is in excess of
amounts required to be paid to investors in the securitization transaction.
APF's right to receive excess cash flows relating to these interest amounts and
other principal based securities will be subordinate to payments that are
required to be made to third party investors in the securitization as well as
other transaction related costs. APF will record these subordinated investments
and interest-only securities at amounts based on their estimated relative fair
values. The ultimate realization of the recorded values depends on a variety of
variables such as market interest rates, occurrences of defaults on the
underlying mortgages and the level and timing of loan prepayments. In general,
interest-only certificates are most severely affected by higher than expected
levels of prepayments of mortgage loans, which can curtail or eliminate the
expected excess interest cash flows. Because of the subordinated nature of this
C-12
<PAGE>
investment, APF's ability to recover both interest-only and residual classes of
securities can be significantly affected by greater than expected loss rates in
the loan portfolio and the resulting reduction in future cash flows from the
portfolio. Finally, both of these types of investments are initially valued
based on projected cash flows discounted at market yields. To the extent
economic conditions change and the market demands higher yields for the types
of cash flows represented by the securities, the ability to recover recorded
amounts for residual certificates prior to their stated maturity may be
significantly reduced.
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 March 31, 1999, the CNL Restaurant
Financial Services Group had outstanding interest rate swap contracts having a
principal amount of $171.4 million. Based on prevailing interest rates, the CNL
Restaurant Financial Services Group would have paid approximately $700,000 if
it had terminated the swap contracts at March 31, 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 will be subject to several risks associated with its derivative
transactions, including credit risk, legal enforceability risk and basis risks.
APF will be exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate swap contracts. In order to minimize legal
enforceability risk, the CNL Restaurant Financial Services Group has, and APF
will continue to, prior to any derivative transaction, enter into with its
counterparties a written "master hedging agreement," as set forth by the
International Swap Dealers Association, which sets forth the terms by which
each counterparty is bound. Additionally, each derivative transaction is
evidenced by a written trade confirmation. Basis risk exists if the factors
affecting the value of the loans upon securitization differ materially from
those affecting the value of the hedges at the time the hedges are terminated.
APF believes that such a risk is substantially mitigated by entering into
amortizing interest rate swaps which are valued based upon the yield curve
through the maturity of the swap.
Parties related to APF will receive benefits from the acquisition and will have
conflicts of interest in the acquisitions.
There are conflicts of interest inherent in the structure of the
acquisitions. James M. Seneff, Jr. and Robert A. Bourne, who serve as the
Chairman of the Board of Directors and Chief Executive Officer, and as the Vice
Chairman and Treasurer of APF, respectively, have financial interests in the
CNL Restaurant Businesses and the Income Funds that may cause their interests
to diverge from those of independent APF stockholders. For a detailed
description of these financial interests, see "-- Benefits to the Principals
Resulting from the Acquisitions," below.
In an effort to reduce conflicts of interest, as part of the CNL Restaurant
Business acquisitions, Mr. Seneff and certain of his affiliates, Mr. Bourne and
certain other executive officers of the Advisor have agreed that, for a period
of three years following the consummation of such acquisitions, they will not
engage in any restaurant property or financing services competitive with the
services that APF will be able to provide as a result of such acquisitions.
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 certain 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.
C-13
<PAGE>
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 properties acquired
pursuant to the consummation of the proposed acquisitions. Also, the presence
of hazardous wastes on such a property could result in personal injury or
similar claims by private plaintiffs. APF cannot be sure that future laws or
regulations will not impose an unanticipated material environmental liability
on any of the acquired restaurant properties or that the tenants of such
restaurant properties will not affect the environmental condition of the
restaurant properties.
The costs of complying with these environmental laws for the restaurant
properties to be acquired from the Income Funds 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 of
the Income Funds.
Existing stockholders will be diluted by the public offering.
Concurrently with or shortly after consummation of the Income Fund
acquisitions, 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 May 31, 1999 and assuming APF had acquired the CNL
Restaurant Businesses and all of the Income Funds as of that date, APF will
have 70,526,807 APF Shares outstanding. This amount already accounts for
estimated expenses to be paid by the Income Funds in the Income Fund
acquisitions in the form of a reduction in the number of APF Shares paid to
each Income Fund. Of such outstanding shares, 64,356,807 will be freely
tradable in the open market.
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 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, upon 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 Information
Memorandum.
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.
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 stockholders would be reduced substantially for each of the
years involved.
C-14
<PAGE>
Lawsuits have been filed against the General Partners and APF in connection
with the Income Fund acquisitions
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 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, limited partners of certain Income Funds
have filed two lawsuits against the General Partners and APF alleging, among
other things, breaches of the General Partners' fiduciary duties in connection
with the Income Fund acquisitions and that APF aided and abetted the General
Partners in breaching the General Partners' fiduciary duty. Such lawsuits could
delay the closing of the acquisition or result in substantial damage claims
against the General Partners, APF and the Operating Partnership. Each Income
Fund is obligated to indemnify the General Partners for claims against the
General Partners arising from the General Partners' role as general partner
other than to extend the General Partners are guilty of negligence, fraud,
misconduct or breach of fiduciary duty. Because the Operating Partnership will
be acquiring the Income Funds through the Income Funds acquisitions, APF and
the Operating Partnership indirectly will be subject to the indemnification
obligations of the Income Funds to the General Partners and any obligations of
the Income Funds to pay damages to the extent not covered by any available
insurance.
Benefits to the Principals Resulting from the Acquisitions
The executive officers of APF, including Mr. Seneff and Mr. Bourne, who
serve as the Chairman of the Board of Directors and Chief Executive Officer,
and as the Vice Chairman and Treasurer of APF, respectively, have financial
interests in the proposed acquisitions that may cause their interests to
diverge from those of independent APF stockholders. Because of their interests
in the CNL Restaurant Businesses and the Income Funds, Messrs. Seneff and
Bourne were excluded from the Special Committee that reviewed the strategic
alternatives and determined that such acquisitions were in the best interests
of APF stockholders.
As the sole stockholders of CNL Group Inc., the majority stockholder of the
Advisor, Mr. Seneff and his wife will receive as consideration for their
indirect ownership interest in the Advisor 2,452,520 of the 3,800,000 APF
Shares allocated by the Board for the acquisition of the Advisor. Mr. Seneff
will receive an additional 1,259,151 APF Shares as consideration for the
acquisition by APF of his interest in the CNL Restaurant Financial Services
Group based on the allocation by the Board of 2,350,000 APF Shares for the
acquisition of the CNL Restaurant Financial Services Group. In addition, Mr.
Bourne will receive 608,000 and 380,108 APF Shares, to be paid by APF as
consideration for his interests in the Advisor and the CNL Restaurant Financial
Services Group, respectively. The benefits that may be realized by Messrs.
Seneff and Bourne as a result of the CNL Restaurant Business acquisitions are
likely to exceed the benefits that they would derive from the Advisor and the
CNL Restaurant Financial Services Group if such acquisitions do not occur.
As General Partners of the Income Funds, Messrs. Seneff and Bourne will
receive an estimated aggregate of 138,000 APF Shares in exchange for their
general partner interests if all of the Income Funds are acquired. In addition,
in their capacity as General Partners, Messrs. Seneff and Bourne are liable for
the repayment of the Income Funds' obligations and debts, which will be assumed
by APF if the Income Funds are acquired. As directors of APF, however, Messrs.
Seneff and Bourne will instead have limited liability to APF, its stockholders
or third parties.
Following the acquisitions, Mr. Seneff will continue to serve as the
Chairman of the Board of Directors of APF and Mr. Bourne will continue to serve
as Vice Chairman. As APF directors, they will be entitled to receive
performance-based incentives, including stock options, under AFP's 1999
Performance Incentive Plan or any option, incentive compensation or other
similar plan approved by the stockholders.
C-15
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth certain financial information for APF, the
Income Funds, the Advisor, CNL Financial Services and CNL Financial Corporation
on a historical basis (see pages C-17 through C-21) and for APF, the CNL
Restaurant Businesses and the Income Funds on a pro forma basis (see pages C-22
and C-28), and should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF APF,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS OF THE INCOME FUNDS" and the Financial Statements contained
elsewhere in this Information Memorandum. The Summary Unaudited Pro Forma
Combined Financial Data combines information from the historical consolidated
statements of earnings of APF, the CNL Restaurant Businesses and the Income
Funds giving effect to the acquisition of the CNL Restaurant Businesses and the
Income Funds as if they had occurred on January 1, 1999 and January 1, 1998.
The unaudited pro forma balance sheet combines information from the historical
consolidated balance sheets of each giving effect to the acquisition of the CNL
Restaurant Businesses and the Income Funds as if APF had completed such
acquisitions on March 31, 1999.
This information is provided for illustrative purposes only. It does not
necessarily reflect what the results of operations or financial position of APF
would have been if the acquisition of the CNL Restaurant Businesses and the
Income Funds had actually occurred on the dates indicated. This information
also does indicate what APF's future operating results or consolidated
financial position will be. The information does not reflect certain additional
costs associated with the acquisition of the CNL Restaurant Businesses and the
Income Funds which APF cannot presently estimate.
C-16
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF APF AND SUBSIDIARIES
<TABLE>
<CAPTION>
Quarter ended
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Operating Data:
Revenues:
Rental and earned income..... $ 12,184,008 $ 6,678,698
Interest and other income.... 2,214,763 1,649,106
------------ ------------
Total revenues............... 14,398,771 8,327,804
------------ ------------
Expenses:
General and administrative... 1,048,600 552,327
Management and advisory fees.. 697,364 362,659
State and other taxes........ 281,877 105,523
Depreciation and amortization.. 1,556,181 779,498
Transaction costs............ 125,926 --
------------ ------------
Total expenses............... 3,709,948 1,800,007
------------ ------------
Net Earnings Before Equity in
Earnings of Joint
Ventures/Minority Interests.. 10,688,823 6,527,797
Equity in earnings of joint
ventures/minority interests.. 17,271 (7,768)
Provision for losses on land
and buildings................ (215,797) --
------------ ------------
Net earnings.................. $ 10,490,297 $ 6,520,029
============ ============
Other Data:*
Weighted average number of
shares of common stock
outstanding during
period (1)................... 37,347,401 19,620,436
Total properties owned at end
of period (2)................ 513 255
Earnings per share............ $ 0.28 $ 0.33
Cash distributions declared
per share of common
stock (3).................... $ 0.38 $ 0.38
Ratio of earnings to fixed
charges...................... 50.03x 103.02x
<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.. 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) --
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 (2)................ 409 244 94 18 --
Earnings per share............ $ 1.21 $ 1.33 $ 1.18 $ 0.39 $ --
Cash distributions declared
per share of common
stock (3).................... $ 1.52 $ 1.49 $ 1.41 $ 0.62 $ --
Ratio of earnings to fixed
charges...................... 79.97x 28.61x 37.40x -- --
<CAPTION>
March 31,
--------------------------
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Real estate assets, net....... $588,797,386 $256,674,704
Mortgages/notes receivable.... $ 41,269,740 $ 30,543,036
Accounts receivable, net...... $ 548,862 499,194
Investment in/due from joint
ventures..................... $ 1,083,564 --
Total assets.................. $708,694,145 $394,757,976
Total liabilities/minority interest.. $ 51,609,124 $ 14,799,968
Total stockholders' equity.... $657,085,021 $379,958,008
<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/due from 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>
- -------
* 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) As of March 31, 1999, APF had acquired 513 restaurant properties.
(3) Approximately 26%, 10%, 18%, 8%, 13% and 42% of cash distributions ($0.10,
$0.04, $0.28, $0.11, $0.18 and $0.26 per APF Share), for the quarters ended
March 31, 1999 and 1998, and the years ended December 31, 1998, 1997, 1996
and 1995, respectively, represent 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 accumulated net
earnings 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.
C-17
<PAGE>
SUMMARY COMBINED HISTORICAL FINANCIAL DATA OF THE INCOME FUNDS
<TABLE>
<CAPTION>
Quarter ended
March 31, 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................ $10,682,007 $11,578,229 $43,462,064 $47,406,656 $49,763,331 $48,448,434 $43,036,875
Interest and other
income................ 335,689 460,089 1,767,773 1,582,186 1,323,870 1,195,322 979,569
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues......... $11,017,696 $12,038,318 $45,229,837 $48,988,842 $51,087,201 $49,643,756 $44,016,444
----------- ----------- ----------- ----------- ----------- ----------- -----------
Expenses:
General and
administrative........ 835,255 690,024 3,261,776 3,397,568 3,090,649 3,052,687 2,184,551
Management and advisory
fees.................. 55,198 57,114 226,177 226,547 226,329 210,908 150,622
State and other taxes.. 279,692 203,225 227,933 227,155 187,257 211,391 136,608
Depreciation and
amortization.......... 1,403,467 1,346,567 5,572,005 5,536,688 5,676,547 5,554,593 5,013,540
Transaction costs...... 530,427 -- 315,081 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses......... 3,104,039 2,296,930 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,
Provision for Loss on
Land and Building and
Other income/expenses.. 7,913,657 9,741,388 35,626,865 39,600,884 41,906,419 40,614,177 36,531,123
Equity in earnings of
joint ventures/minority
interest............... 1,131,714 928,475 3,569,877 3,619,807 2,964,176 2,566,728 1,898,156
Gain on sale of
properties............. 738,775 1,733,227 2,519,894 4,224,500 524,722 10,822 761,669
Other revenue
(expenses)............. -- (45,150) (45,150) 214,000 -- -- 161,850
Provision for loss on
land and building...... (60,882) -- (2,834,338) (665,574) (316,548) (207,844) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings............ $ 9,723,264 $12,357,940 $38,837,148 $46,993,617 $45,078,769 $42,983,883 $39,352,798
=========== =========== =========== =========== =========== =========== ===========
Other data:
Total properties owned
at end of period....... 574 576 573 588 603 603 588
Total cash distributions
declared (1)........... $11,629,500 $17,460,557 $53,610,357 $48,894,454 $48,535,704 $46,827,898 $42,546,602
Total cash distributions
declared per $10,000... $ 211 $ 317 $ 975 $ 889 $ 882 $ 859 $ 810
</TABLE>
<TABLE>
<CAPTION>
March 31, 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.................... $364,782,582 $377,750,247 $366,370,743 $387,768,898 $404,109,694 $415,745,756 $402,191,678
Mortgages/notes
receivable............. $ 4,414,245 $ 5,573,658 $ 4,807,714 $ 5,586,571 $ 4,894,615 $ 2,627,418 $ --
Accounts receivable,
net.................... $ 621,342 $ 801,852 $ 1,302,323 $ 1,268,508 $ 1,639,685 $ 1,477,605 $ 1,707,164
Investment in/due from
joint ventures......... $ 50,891,342 $ 44,566,660 $ 49,106,438 $ 41,608,848 $ 32,693,871 $ 29,432,410 $ 27,735,605
Total assets............ $460,067,244 $478,550,872 $462,217,940 $477,792,517 $478,724,970 $481,643,284 $465,754,289
Total
liabilities/minority
interest............... $ 15,705,758 $ 22,612,549 $ 15,950,214 $ 15,921,571 $ 16,183,187 $ 15,826,566 $ 18,298,166
Total equity............ $444,361,486 $455,938,323 $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 year ended December 31, 1998 include special
distributions of net sales proceeds from the sale of properties.
C-18
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA OF
CNL FUND ADVISORS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Quarter Quarter Six months
ended ended ended Year ended Year ended June 30,
March 31, March 31, 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................... $2,307,364 $2,317,830 $14,408,750 $19,954,188 $6,015,055 $3,650,591 $ 549,067 $ --
Interest and other
income................ 47,213 25,673 89,415 227,597 157,872 25,759 -- 81
---------- ---------- ----------- ----------- ---------- ---------- --------- -----
Total revenues......... $2,354,577 $2,343,503 $14,498,165 $20,181,785 $6,172,927 $3,676,350 $ 549,067 $ 81
---------- ---------- ----------- ----------- ---------- ---------- --------- -----
Expenses:
General and
administrative........ 2,587,040 1,597,660 6,139,588 7,467,957 3,674,044 1,674,267 709,280 81
Depreciation and
amortization.......... 39,581 22,071 81,028 81,024 58,110 14,780 2,006 --
Interest expense....... 50,730 27,582 86,141 219,022 42,151 7 -- --
---------- ---------- ----------- ----------- ---------- ---------- --------- -----
Total expenses......... 2,677,351 1,647,313 6,306,757 7,768,003 3,774,305 1,689,054 711,286 81
---------- ---------- ----------- ----------- ---------- ---------- --------- -----
Income (Loss) Before
Benefit (Provision) for
Federal Income Taxes .. (322,774) 696,190 8,191,408 12,413,782 2,398,622 1,987,296 (162,219) --
Benefit (Provision) for
federal income taxes... 127,496 (250,482) (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..... (195,278) 445,708 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..... -- -- -- 39,237 -- -- -- --
---------- ---------- ----------- ----------- ---------- ---------- --------- -----
Net income (loss)....... $ (195,278) $ 445,708 $ 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 -- 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.................. $ (27) $ 70 $ 697 $ 1,167 $ 227 $ 184 $ (17) $ --
Earnings (loss) per
share--Class B Common
Stock.................. $ (5) $ -- $ 146 $ -- $ -- $ -- $ -- $ --
Total dividends
declared--Class A
Common Stock........... $ -- $ -- $ 2,126,525 $ 8,431,566 $ -- $ -- $ -- $ --
Total dividends
declared--Class B
Common Stock........... $ -- $ -- $ 119,808 $ -- $ -- $ -- $ -- $ --
Dividends declared per
share--Class A Common
Stock.................. $ -- $ -- $ 332 $ 1,317 $ -- $ -- $ -- $ --
Dividends declared per
share--Class B Common
Stock.................. $ -- $ -- $ 35 $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
June 30,
March 31, March 31, 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 $ -- $ -- $ -- $ --
Accounts receivable,
net.................... $7,141,967 $4,358,050 $6,764,034 $6,031,010 $2,926,461 $ 609,481 $ 375,418 $ --
Total assets............ $8,223,820 $6,649,734 $7,944,933 $7,026,586 $4,430,976 $1,030,637 $ 797,758 $201,267
Total liabilities....... $1,082,568 $1,767,478 $1,897,076 $3,708,198 $1,554,586 $ 893,251 $ 903,491 $200,267
Total equity............ $7,141,252 $4,882,256 $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. During the quarter ended March 31,
1999, a substantial number of the acquisitions made by the Advisor was made
utilizing uninvested proceeds from of the offering completed in 1998, for
which the Advisor had previously been compensated. Following the investment
of offering proceeds, the advisory agreement with the Advisor now provides
for acquisition fees to be paid to it based on 4.5% of the acquisition
purchase price of a restaurant property.
C-19
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF CNL FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
Inception
(October 9, 1995
Year Ended June 30, through
Quarter Ended Quarter Ended Six Months Ended ---------------------- June 30,
March 31, 1999 March 31, 1998 December 31, 1998 1998 1997 1996)
-------------- -------------- ----------------- ---------- ---------- ----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Fees................... $1,391,466 $1,278,487 $3,004,975 $5,974,885 $1,804,357 $ --
Interest and other
income................ 129,362 139,449 283,628 608,560 54,641 --
---------- ---------- ---------- ---------- ---------- ---------
Total revenues......... 1,520,828 1,417,936 3,288,603 6,583,445 1,858,998 --
---------- ---------- ---------- ---------- ---------- ---------
Expenses:
General and
administrative........ 1,616,152 1,146,920 4,010,503 6,158,571 1,033,555 188,859
Depreciation and
amortization.......... 26,238 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------
Total expenses......... 1,642,390 1,146,920 4,010,503 6,158,571 1,033,555 188,859
---------- ---------- ---------- ---------- ---------- ---------
Income (Loss) Before
Benefit (Provision)
for Income Taxes...... (121,562) 271,016 (721,900) 424,874 825,443 (188,859)
Benefit (Provision) for
Federal Income Taxes.. 48,017 (107,051) 285,150 (167,826) (326,050) 76,793
---------- ---------- ---------- ---------- ---------- ---------
Net Income (Loss)....... $ (73,545) $ 163,965 $ (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.................. $ (33) $ 82 $ (218) $ 132 $ 277 $ (83)
Earnings (loss) per
share--Class B Common
Stock.................. $ (10) $ -- $ (21,838) $ -- $ -- $ --
<CAPTION>
Inception
(October 9, 1995
June 30, through
March 31, March 31, December 31, ---------------------- June 30,
1999 1998 1998 1998 1997 1996)
-------------- -------------- ----------------- ---------- ---------- ----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Due from related
parties, net........... $5,457,493 $9,335,081 $5,215,244 $6,836,000 $3,990,489 $ 17,405
Total assets............ $6,308,406 $9,580,294 $6,494,271 $7,144,393 $4,533,936 $432,604
Total liabilities....... $ 868,099 $1,474,721 $1,000,989 $1,266,191 $3,603,195 $ 1,256
Total equity............ $5,440,307 $8,105,573 $5,493,282 $5,878,202 $ 930,741 $431,348
</TABLE>
C-20
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF CNL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Inception
Year Ended June 30, (October 9, 1995)
Quarter Ended Quarter Ended Six Months Ended -------------------------- through
March 31, 1999 March 31, 1998 December 31, 1998 1998 1997 June 30, 1996
-------------- -------------- ----------------- ------------ ------------ -----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Fees................... $ 8,137 $ -- $ -- $ -- $ -- $ --
Interest and other
income................ 5,233,919 5,197,990 14,299,814 20,324,223 3,346,226 52,063
------------ ------------ ------------ ------------ ------------ ----------
Total revenues......... 5,242,056 5,197,990 14,299,814 20,324,223 3,346,226 52,063
------------ ------------ ------------ ------------ ------------ ----------
Expenses:
General and
administrative........ 64,186 297,195 1,292,492 997,856 66,112 956
Management and advisory
fees.................. 611,196 167,415 734,890 2,245,039 205,837 3,543
Depreciation and
amortization.......... -- 21,992 85,086 17,891 8,641 286
Interest............... 4,769,268 4,434,378 10,879,294 17,452,876 2,875,881 42,965
------------ ------------ ------------ ------------ ------------ ----------
Total expenses......... 5,444,650 4,920,980 12,991,762 20,713,662 3,156,471 47,750
------------ ------------ ------------ ------------ ------------ ----------
Income (Loss) Before
Benefit (Provision)
for Income Taxes...... (202,594) 277,010 1,308,052 (389,439) 189,755 4,313
Benefit (Provision) for
Federal Income Taxes.. 73,166 (101,672) (493,735) 94,504 (61,066) (1,331)
------------ ------------ ------------ ------------ ------------ ----------
Net Income (Loss)....... $ (129,428) $ 175,338 $ 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.................. $ (582) $ 877 $ 3,644 $ (1,512) $ 715 $ 19
Earnings (loss) per
share--Class B Common
Stock.................. $ (26) $ -- $ 81,432 $ -- $ -- $ --
<CAPTION>
Inception
(October 9, 1995
June 30, through
March 31, March 31, December 31, -------------------------- June 30,
1999 1998 1998 1998 1997 1996)
-------------- -------------- ----------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data: (unaudited)
Mortgages/notes
receivable............. $247,896,287 $227,941,495 $211,280,226 $374,482,298 $140,781,095 $6,011,478
Due from related party.. $ 1,969,339 $ -- $ 1,043,527 $ 0 $ 0 $ 234,125
Total assets............ $264,700,433 $235,326,765 $223,936,076 $391,832,399 $146,311,547 $6,399,857
Total liabilities....... $260,133,862 $230,930,978 $219,991,725 $388,108,046 $146,179,776 $6,396,775
Total equity............ $ 4,566,571 $ 4,395,787 $ 3,944,351 $ 3,724,353 $ 131,771 $ 3,082
</TABLE>
C-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Quarter Ended March 31, 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........... $12,184,008 $2,339,153(a) $14,523,161 $ -- $ -- $ -- $ --
Fees............. -- -- -- 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income..... 2,214,763 -- 2,214,763 47,213 129,362 5,233,919 62,068 (d)
----------- ---------- ----------- --------- --------- --------- -----------
Total Revenue... 14,398,771 2,339,153 16,737,924 2,354,577 1,520,828 5,242,056 (2,388,595)
Expenses:
General and
Administrative... 1,095,269 -- 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees.... 697,364 -- 697,364 -- -- 611,196 (1,308,560)(f)
Fees to Related
Parties.......... -- -- -- 23,326 292,575 -- (292,786)(g)
Interest
Expense.......... -- -- -- 50,730 -- 4,769,268 --
State Taxes...... 235,208 -- 235,208 -- -- -- --
Depreciation--
Other............ -- -- -- 39,581 26,238 -- --
Depreciation--
Property......... 1,548,813 349,465(a) 1,898,278 -- -- -- --
Amortization..... 7,368 -- 7,368 -- -- -- 506,712 (h)
Transaction
Costs............ 125,926 -- 125,926 -- -- -- --
----------- ---------- ----------- --------- --------- --------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,472,368)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... 10,688,823 1,989,688 12,678,511 (322,774) (121,562) (202,594) (916,227)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 -- 17,271 -- -- -- --
Gain on Sale of
Properties....... -- -- -- -- -- -- --
Provision For
Loss on
Properties....... (215,797) -- (215,797) -- -- -- --
----------- ---------- ----------- --------- --------- --------- -----------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes............ 10,490,297 1,989,688 12,479,985 (322,774) (121,562) (202,594) (916,227)
Benefit
(Provision) for
Federal Income
Taxes............ -- -- -- 127,496 48,017 73,166 (248,679)(i)
----------- ---------- ----------- --------- --------- --------- -----------
Net
Earnings(Losses).. $10,490,297 $1,989,688 $12,479,985 $(195,278) $ (73,545) $(129,428) $(1,164,906)
=========== ========== =========== ========= ========= ========= ===========
Earnings Per
Share............ $ 0.28 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========= ========= ========= ===========
Book Value Per
Share............ $ 17.59 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========= ========= ========= ===========
Dividends per
share/unit....... $ 0.38 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========= ========= ========= ===========
Weighted Average
of Shares
Outstanding
During Period.... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
=========== ========== =========== ========= ========= ========= ===========
<CAPTION>
Historical Acquisition
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ ------------------- --------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $14,523,161 $10,682,007 $ 276,874 (j) $25,482,042
Fees............. 1,256,304 -- (277,876)(k) 978,428
Interest and
Other Income..... 7,687,325 335,689 -- 8,023,014
------------ ------------ ------------------- --------------
Total Revenue... 23,466,790 11,017,696 (1,002) 34,483,484
Expenses:
General and
Administrative... 4,669,012 835,255 (409,390)(l),(m) 5,094,877
Management and
Advisory Fees.... -- 55,198 (55,198)(n) --
Fees to Related
Parties.......... 23,115 -- -- 23,115
Interest
Expense.......... 4,819,998 -- -- 4,819,998
State Taxes...... 235,208 279,692 111,521 (o) 626,421
Depreciation--
Other............ 65,819 -- -- 65,819
Depreciation--
Property......... 1,898,278 1,395,730 510,725 (p) 3,804,733
Amortization..... 514,080 7,737 -- 521,817
Transaction
Costs............ 125,926 530,427 -- 656,353
------------ ------------ ------------------- --------------
Total Expenses.. 12,351,436 3,104,039 157,658 15,613,133
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... 11,115,354 7,913,657 (158,660) 18,870,351
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 17,271 1,131,714 (128,387)(q) 1,020,598
Gain on Sale of
Properties....... -- 738,775 -- 738,775
Provision For
Loss on
Properties....... (215,797) (60,882) -- (276,679)
------------ ------------ ------------------- --------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes............ 10,916,828 9,723,264 (287,047) 20,353,045
Benefit
(Provision) for
Federal Income
Taxes............ -- -- -- --
------------ ------------ ------------------- --------------
Net
Earnings(Losses).. $10,916,828 $ 9,723,264 $ (287,047) $20,353,045
============ ============ =================== ==============
Earnings Per
Share............ n/a $ 0.10 n/a $ 0.29
============ ============ =================== ==============
Book Value Per
Share............ n/a $ 4.52 n/a $ 17.74
============ ============ =================== ==============
Dividends per
share/unit....... n/a n/a n/a n/a
============ ============ =================== ==============
Weighted Average
of Shares
Outstanding
During Period.... 43,497,401 n/a 27,028,337 70,525,738(r)
============ ============ =================== ==============
</TABLE>
C-22
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Quarter Ended March 31, 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.......... 513 29 542 n/a n/a n/a n/a
Cash
distributions
declared ....... $ 14,237,405 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared per
$10,000 ........ $ 191 n/a n/a n/a n/a n/a n/a
Ratio of
earnings to
fixed charges... 50.03x n/a n/a n/a n/a n/a n/a
Balance sheet
data:
Real estate
assets, net..... $588,797,386 $58,749,637(u) $647,547,023 $ -- $ -- $ -- $ --
Mortgages/notes
receivable...... $ 41,269,740 $ 0 $ 41,269,740 $ -- $ -- $247,896,287 $ --
Receivables,
net............. $ 548,862 $ 0 $ 548,862 $7,141,967 $5,457,493 $ 1,969,339 (148,629)(w)(y)
Investment
in/due from
joint ventures.. $ 1,083,564 $ 0 $ 1,083,564 $ -- $ -- $ -- $ --
Total assets.... $708,694,145 $33,656,518(u) $742,350,663 $8,223,820 $6,308,406 $264,700,433 $35,630,176 (w)(y)(v1)
Total
liabilities..... $ 51,609,124 $33,656,518(u) $ 85,265,642 $1,082,568 $ 868,099 $260,133,862 $ (420,370)(w)(x)
Total equity.... $657,085,021 $ 0 $657,085,021 $7,141,252 $5,440,307 $ 4,566,571 $36,050,546 (x)(v1)
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
-------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 542 574 n/a 1,116
Cash
distributions
declared ....... -- $ 11,629,500 n/a $ 22,295,067(s)
Cash
distributions
declared per
$10,000 ........ -- $ 211 n/a $ 217(t)
Ratio of
earnings to
fixed charges... n/a n/a n/a 5.08x
Balance sheet
data:
Real estate
assets, net..... $ 647,547,023 $364,782,582 $114,160,294 (v2) $1,126,489,899
Mortgages/notes
receivable...... $ 289,166,027 $ 4,414,245 $ 0 $ 293,580,272
Receivables,
net............. $ 14,969,032 $ 621,342 $ (1,042,835)(v2) $ 14,547,539
Investment
in/due from
joint ventures.. $ 1,083,564 $ 50,891,342 $ 16,083,265 (v2) $ 68,058,171
Total assets.... $1,057,213,498 $460,067,244 $ 95,162,423 (y) $1,612,443,165
Total
liabilities..... $ 346,929,801 $ 15,705,758 $ (1,042,835)(y) $ 361,592,724
Total equity.... $ 710,283,697 $444,361,486 $ 96,205,258 (v2) $1,250,850,441
</TABLE>
C-23
<PAGE>
(a) Represents rental and earned income of $2,339,153 and depreciation
expense of $349,465 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through May 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........................... $ (292,575)
Secured equipment lease fees............................... (26,127)
Advisory fees.............................................. (63,393)
Reimbursement of administrative costs...................... (182,125)
Acquisition fees........................................... (9,483)
Underwriting fees.......................................... (211)
Administrative, executive and guarantee fees............... (290,036)
Servicing fees............................................. (257,767)
Development fees........................................... (14,678)
Management fees............................................ (697,364)
-----------
Total.................................................... $(1,833,759)
===========
</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 quarter ended March 31, 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 quarter ended
March 31, 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.................................................. $62,068
</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............................. $(377,734)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $ (697,364)
Administrative executive and guarantee fees................ (290,036)
Servicing fees............................................. (257,767)
Advisory fees.............................................. (63,393)
-----------
$(1,308,560)
===========
</TABLE>
C-24
<PAGE>
(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.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (v).
<TABLE>
<S> <C>
Amortization of goodwill....................................... $506,712
</TABLE>
(i) Represents the elimination of $248,679 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 $276,874 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.............................................. $ (55,198)
Reimbursement of administrative costs........................ (222,678)
---------
$(277,876)
=========
</TABLE>
(l) Represents the elimination of $222,678 in administrative costs
reimbursed by the Income Funds to the Advisor.
(m) Represents savings of $186,712 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 $55,198 in management fees by the Income
Funds to the Advisor.
(o) Represents additional state income taxes of $111,521 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through March 31, 1999 had been
acquired on January 1, 1999 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, 1999 and that
these entities had operated under a REIT structure as of January 1,
1999.
(p) Represents an increase in depreciation expense of $510,725 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 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 $128,387
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.
C-25
<PAGE>
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1999 were assumed to have been
issued and outstanding as of January 1, 1999. 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) Pro forma distributions were assumed to be declared based on pro forma
cash from operations, adjusted to add back the cash invested in notes
receivable from the pro forma statement of cash flows.
(t) Represents pro forma distributions declared divided by pro forma
weighted average dollars outstanding multiplied by an average $10,000
investment.
(u) Represents the use of $33,656,518 borrowed under APF's credit facility
and the use of $25,093,119 in cash and cash equivalents at March 31,
1999 to pro forma properties acquired from April 1, 1999 through May
31, 1999 as if these properties had been acquired on March 31, 1999.
Based on historical results through May 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.
(v) 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
Financial
Services
Advisor Group Income Funds Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered.......... 3,800,000 2,350,000 27,028,337.2 33,178,337.2
Exchange Value.......... $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration..... $76,000,000 $47,000,000 $540,566,744 $663,566,744
Cash Consideration...... -- -- 6,298,000 6,298,000
APF Transaction Costs... 1,214,317 750,959 8,737,724 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price.... 77,214,317 47,750,959 555,602,468 680,567,744
=========== =========== ============ ============
Net Assets--Historical.. 7,141,252 10,006,878 444,361,486 461,509,616
Purchase Price
Adjustments:
Land and buildings on
operating leases..... 90,953,669 90,953,669
Net investment in
direct financing
leases............... 23,206,625 23,206,625
Investment in joint
ventures............. 16,083,265 16,083,265
Accrued rental
income............... (18,227,192) (18,227,192)
Intangibles and other
assets............... (2,792,876) (775,385) (3,568,261)
Goodwill(i)........... 40,536,957 -- 40,536,957
Excess purchase
price................ 70,073,065 -- -- 70,073,065
----------- ----------- ------------ ------------
Total allocation...... $77,214,317 $47,750,959 $555,602,468 $680,567,744
=========== =========== ============ ============
</TABLE>
(i) Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
C-26
<PAGE>
The APF Transaction costs of $10,703,000 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 $70,073,065 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 40,536,957 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
APIC (CFA, CFS, CFC).................................. 13,857,645
Retained Earnings..................................... 3,277,060
Accumulated distributions in excess of earnings....... 70,073,065
Goodwill for CFC (Intangible assets).................. 40,536,957
CFC/CFS Org Costs/Other Assets........................ 2,792,876
Cash to pay APF transaction costs..................... 1,965,276
APF Common Stock...................................... 61,500
APF APIC.............................................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital...................................... 444,361,486
Land and buildings on operating leases................ 90,953,669
Net investment in direct financing leases............. 23,206,625
Investment in joint ventures.......................... 16,083,265
Deferred rental income................................ 0
Accrued rental income............................... 18,227,192
Intangibles and other assets........................ 775,385
Cash to pay APF Transaction costs................... 8,737,724
Cash consideration to Income Funds.................. 6,298,000
APF Common Stock.................................... 270,283
APF APIC............................................ 540,296,461
(To record acquisition of Income Funds)
</TABLE>
(w) Represents the elimination by APF of $148,629 in related party payables
recorded as receivables by the Advisor.
(x) Represents the elimination of federal income taxes payable of $271,741
from liabilities assumed in the Income Fund 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
Income Fund acquisition.
(y) Represents the elimination by the Income Funds of $1,042,835 in related
party payables recorded as receivables by the Advisor.
C-27
<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 $21,919,865(a) $55,049,526 $ -- $ -- $ -- $ --
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 $21,919,865 $64,106,902 $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 2,889,368(a) 6,931,658 -- -- -- (340,898)(r)
Amortization..... 11,808 -- 11,808 57,077 -- 95,116 2,026,848 (h)
Transaction
Costs............ 157,054 -- 157,054 -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------- ------------
Total Expenses.. 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829 (9,376,100)
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 $19,030,497 $51,808,577 $17,613,851 $ (773,774) $(3,020,614) $(23,132,524)
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 19,030,497 51,182,905 17,613,851 (773,774) 673,737 (23,132,524)
Benefit/(Provision)
for Federal
Income Taxes..... -- -- -- (6,957,472) 305,641 (246,603) 6,898,434 (i)
----------- ----------- ----------- ----------- ---------- ----------- ------------
Net Earnings
(Losses)........ $32,152,408 $19,030,497 $51,182,905 $10,656,379 $ (468,133) $ 427,134 $(16,234,090)
=========== =========== =========== =========== ========== =========== ============
Earnings Per
Share............ $ 1.21 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== =========== ============
Book Value Per
Share............ $ 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
=========== =========== =========== =========== ========== =========== ============
Wtd. Avg. Shares
Outstanding...... 26,648,219 7,851,320 34,499,539 n/a n/a n/a 6,150,000
=========== =========== =========== =========== ========== =========== ============
Other data:
Total properties
owned at end of
period........... 409 96 505 n/a n/a n/a n/a
Cash
distributions
declared ........ $39,449,149 n/a n/a n/a n/a n/a n/a
Cash
distributions
declared
per $10,000 ..... $ 740 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
<CAPTION>
Historical Acquisition
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income........... $55,049,526 $43,462,064 $1,107,494 (j) $ 99,619,084
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... $90,497,714 $45,229,837 $ 369,596 $136,097,147
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......... 6,590,760 5,407,088 2,042,902 (p) 14,040,750
Amortization..... 2,190,849 164,917 -- 2,355,766
Transaction
Costs............ 157,054 315,081 -- 472,135
------------ ------------ ----------------- ---------------
Total Expenses.. 48,002,198 9,602,972 776,872 58,382,042
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....... $42,495,516 $35,626,865 $(407,276) $ 77,715,105
Equity in
Earnings of Joint
Ventures/Minority
Interest......... (14,138) 3,569,877 (513,548)(q) 3,042,191
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..... 45,564,195 38,837,148 (920,824) 83,480,519
Benefit/(Provision)
for Federal
Income Taxes..... -- -- -- --
------------ ------------ ----------------- ---------------
Net Earnings
(Losses)........ $45,564,195 $38,837,148 $ (920,824) $ 83,480,519
============ ============ ================= ===============
Earnings Per
Share............ n/a $ 0.40 n/a $ 1.23
============ ============ ================= ===============
Book Value Per
Share............ n/a $ 4.54 n/a $ 17.76
============ ============ ================= ===============
Dividends per
share/unit....... n/a n/a n/a n/a
============ ============ ================= ===============
Wtd. Avg. Shares
Outstanding...... 40,649,539 n/a 27,028,337 67,677,876(s)
============ ============ ================= ===============
Other data:
Total properties
owned at end of
period........... 505 573 n/a 1,078
Cash
distributions
declared ........ n/a $53,610,357 n/a $ 92,945,904(t)
Cash
distributions
declared
per $10,000 ..... n/a $ 975 n/a $ 937(u)
Ratio of earnings
to fixed
charges.......... n/a n/a n/a 4.87x
</TABLE>
C-28
<PAGE>
(a) Represents rental and earned income of $21,919,865 and depreciation expense
of $2,889,368 as if properties that had been operational when they were
acquired by APF from January 1, 1998 through May 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
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>
C-29
<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 (v)
above.
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,026,848
</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 May 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 $2,042,902 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 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 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 $513,548 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.
C-30
<PAGE>
(r) Represents the decrease in depreciation expense of $340,898 as a result of
eliminating acquisition fees (see Note 4(II)(b) to the Notes and
Management's Assumptions to Unaudited Pro Forma Financial Statements)
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) Pro forma distributions were assumed to be declared based on pro forma cash
from operations, adjusted to add back the cash invested in notes receivable
from the pro forma statement of cash flows.
(u) Represents pro forma distributions declared divided by pro forma weighted
average dollars outstanding multiplied by an average $10,000 investment.
C-31
<PAGE>
BACKGROUND OF AND REASONS FOR THE ACQUISITIONS
General
The Board of Directors believes that transforming APF into a full-service
REIT by acquiring the CNL Restaurant Businesses and significantly increasing
APF's size by acquiring the Income Funds will enhance APF stockholder value.
APF believes that such acquisitions will achieve three important strategic
objectives for APF. First, the Board believes that APF's ability to provide
full-service restaurant property services will give it a competitive advantage
over other REITs that typically provide a more limited array of services to
their prospective restaurant owners and operators. Second, the Board believes
that the acquisition of internal restaurant property service capabilities,
including management, acquisition, development and expanded financing
capabilities, will improve APF's performance through increased control over
functions that are important to the growth of its business. Third, the Board
believes that the acquisitions will facilitate listing of the APF Shares on the
NYSE and may increase the value of the APF Shares following such listing. The
reasons for the acquisitions are described in greater detail below.
APF believes that the acquisition of the CNL Restaurant Businesses and the
Income Funds will permit it to achieve its strategic goal of becoming a leading
provider of financial, development, advisory and other real estate services to
operators of national restaurant chains. The acquisitions should enable APF,
unlike a number of its competitors, to position itself in the restaurant
industry as a provider of a complete range of restaurant financing options and
development services. APF believes that its 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, will make 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, will permit a
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, KFC, Jack in the
Box, 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 Corp., Foodmaker, Inc., Golden Corral
Corporation, IHOP and Chevy's Inc.
Reasons for Acquiring the CNL Restaurant Businesses
Cost-Efficiency of Acquiring Advisory and Development
Capabilities. Historically, APF has not had 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, development and
financing team. As APF's asset and revenue base has grown in recent years,
however, the amount of advisory and development fees paid to the Advisor has
approached the level of costs which APF believes it would incur were those
capabilities brought in-house. APF believes that the advisory and development
fees it would pay if the CNL Restaurant Business acquisitions were not
consummated would be likely to exceed the incremental operating costs of
becoming internally advised. Accordingly, APF believes that it will experience
long-term cost savings as a result of the CNL Restaurant Business acquisitions,
although such cost savings are difficult to quantify.
Market Leadership in the Provision of Restaurant Property Services. As
discussed above, APF believes that the acquisition of the CNL Restaurant
Businesses will permit it to become a leading provider of financial,
development and other real estate services to operators of national and
regional restaurant chains. APF believes that the CNL Restaurant Business
acquisitions should position APF in the restaurant industry as a provider of a
complete range of restaurant financing options and development services. APF
believes that its ability to offer complete restaurant development services,
including site selection, construction management and build-to-suit
C-32
<PAGE>
development, together with its ability to provide its clients with financing
options, such as triple-net leasing, mortgage loans and secured equipment
financing, will make it a preferred provider for all the real estate related
business needs of restaurant chains and restaurant chain operators. APF
believes that restaurant chain operators will find the broad range of services
offered by APF to be highly attractive, because it will permit them to focus on
the operation of their restaurant businesses while avoiding the distractions
associated with the acquisition, construction, development and financing of
additional restaurant properties.
Enhanced Public Market Valuation of Assets. APF believes 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 based in
part on the growth potential of such companies and have historically exceeded
the net book values of their real estate assets. In addition, APF believes that
the marketplace continues to value internally-advised REITs more favorably than
externally-advised REITs. Of the REITs that are traded on the NYSE and have
equity market capitalizations of more than $1 billion, approximately 89% are
self-advised. APF believes that investors and analysts view an internally-
advised structure more favorably and that, consequently, internally-advised
REITs, as compared to externally-advised REITs, have commanded a premium in the
marketplace based on traditional financial measures such as the multiple of
stock price to funds from operations per share. This, in turn, may provide such
REITs with a competitive advantage in financing their investment portfolios.
Although it is not possible to quantify the existence of such premium or the
benefit obtained thereby, APF believes that the acquisition of CNL Restaurant
Businesses and the Income Funds and subsequent listing of the APF Shares on the
NYSE will permit APF stockholders to dispose of their APF Shares on more
favorable terms than are currently available and will permit APF itself to
raise capital on more advantageous terms.
Expansion of Financing Options for APF's Customers. APF's historic approach
has been to invest in restaurant properties to be leased to restaurant chains
on a long-term, triple-net basis. APF believes that many restaurant chains find
such leasing to be an attractive method by which to finance the acquisition of
additional restaurants. APF recognizes, however, that restaurant chains may
also find mortgage loans to be an attractive source of financing depending on,
among other things, the relative costs of triple-net leasing as compared to
long-term mortgage financing. APF has historically provided mortgage loan
financing on a limited basis. The acquisition of the CNL Restaurant Financial
Services Group would significantly expand APF's ability to offer mortgage loan
financing to restaurant chains.
The acquisition of the CNL Restaurant Financial Services Group also will
permit APF to offer a full range of financing options to restaurant property
owners and operators, which it believes will increase the pool of available
customers for APF's products and will enable APF to compete more effectively
with other restaurant chain finance companies. In addition, APF will be more
competitive within its existing group of targeted customers because of its
ability to offer the most appropriate financial product to a particular tenant.
Acquisition of Mortgage Loan Securitization Capabilities. The acquisition of
the CNL Restaurant Financial Services Group also will provide APF with the
ability to securitize the mortgage loans it originates, as described above in
"DESCRIPTION OF THE ACQUISITIONS -- Acquisition of the CNL Restaurant Financial
Services Group." APF believes that the expansion of its financing capabilities
to include the CNL Restaurant Financial Services Group's securitization
capabilities will enable APF to access more financing opportunities and,
ultimately, to increase cash available for distributions to the APF
stockholders. APF believes that 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 equity or debt securities.
Future Development and Mortgage Loan Opportunities. As a result of APF's
acquisition of the CNL Restaurant Businesses, APF will acquire restaurant
property development capabilities and expand its mortgage origination,
securitization and servicing capabilities. The acquisition of those
capabilities will provide APF with
C-33
<PAGE>
an additional pool of operators of national and regional restaurant chains to
which it can offer triple-net lease and mortgage loan financing. The CNL
Restaurant Businesses' current financing commitments with operators of national
and regional restaurant chains either through triple-net lease financing or
mortgage loan financing are $123 million. APF will be 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, APF believes that the Advisor's relationship with CNL
Advisory Services, Inc., or CAS, will enhance APF's financing business. CAS
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 quarter ended March 31, 1999, CAS
negotiated the acquisition of 23 restaurant properties having an aggregate
purchase price of in excess of $23.1 million. CAS has granted to the Advisor a
right of first refusal to provide triple-net lease or mortgage loan financing
to CAS' clients. APF believes this relationship will provide APF with an
additional pipeline of potential customers to which it can target its financial
products. See "APF's BUSINESS -- Strategic Alliance with CNL Advisory Services,
Inc." for more information regarding APF's strategic alliance with CAS.
Greater Reduction of Conflicts of Interest. Following the acquisition of the
Advisor, APF will be operated as an internally-advised REIT with management
employed by APF, thereby eliminating Advisor fees, reducing various conflict of
interests and more closely aligning the interests of stockholders and
management. The persons engaged to manage APF will be directly accountable to
APF. They will not be employees of a separate management company or investment
adviser whose activities could be determined by objectives and goals
inconsistent with APF's financial objectives. Management will owe its duty of
loyalty only to APF. The incorporation of all aspects of the management into
APF assures a commitment to hands-on management. By contrast, externally-
advised REITs may have no such commitment from a management team to focus
exclusively on their portfolios.
In order to further reduce conflicts of interest, as part of the CNL
Restaurant Businesses acquisition, Mr. Seneff and certain of his affiliates,
Mr. Bourne and certain other executive officers of the Advisor have agreed
that, for a period of three years following the consummation of such
acquisitions, they will not engage in any restaurant property or financing
services competitive with the services that APF will be able to provide as a
result of those acquisitions other than through any entities that operated
restaurant properties as of the date of the merger agreements.
Reasons for Acquiring the Income Funds
Operational Economies of Scale. Because the Income Funds own restaurant
properties similar to those in APF's current restaurant property portfolio, APF
believes that the combination of the Income Funds into APF's existing business
will result in administrative and operational economies of scale and cost
savings for APF, although such savings are difficult to quantify.
Enhanced Liquidity for APF Stockholders. Concurrently with the consummation
of the Income Fund acquisitions, APF intends to achieve one of its primary
strategic goals by listing the APF Shares on the NYSE. Listing will
substantially enhance liquidity for APF stockholders, as there currently is no
established trading market for APF Shares.
Because the consideration paid by APF for the Income Funds will consist of
newly-issued APF Shares (except to the extent that Limited Partners of acquired
Income Funds affirmatively vote against the acquisition by APF of their Income
Funds and elect to receive the notes), the acquisition of the Income Funds will
further enhance liquidity by increasing both size of the APF's stockholder base
and the public float of the APF Shares.
Broader Analyst Coverage/Enhanced Ability to Raise Capital. At its current
size, APF cannot be certain that the APF Shares, if listed, would attract
sufficient interest from research analysts and institutional investors
C-34
<PAGE>
to raise capital on terms favorable to APF. The acquisition of the Income
Funds, which own restaurant properties similar to those in APF's existing
restaurant property portfolio, would provide an opportunity for APF to
substantially increase the size of its portfolio of restaurant properties. If
all of the Income Funds are acquired, APF would become one of the largest
triple-net lease REITs in the United States. APF believes that by increasing
its size, its stockholder base and its public float through the acquisition of
the Income Funds, it would be likely to develop a following among research
analysts and institutional investors and would therefore be able to raise
capital on more favorable terms. Broader coverage by financial analysts
potentially may enhance the value of the APF Shares and may increase the volume
of trading in the APF Shares, which would increase their liquidity.
Risk Diversification. Although the diversification effects of the
acquisition of the Income Funds will differ depending on which Income Funds
participate, the combination of the restaurant properties owned by the
participating Income Funds with APF's existing restaurant properties will
diversify APF's investment over a larger number of restaurant properties and a
broader group of restaurant types and tenants and geographic locations. This
diversification will reduce the dependence of APF's investment upon the
performance of, and the exposure to the risks associated with, the particular
group of restaurant properties currently owned by APF.
Chronology of the Acquisitions
In December 1997, APF's management, which includes 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., 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, including the Income Funds, CNL
Income Funds XVII and XVIII and eight CNL Income & Growth Funds, which
are referred to as the Growth Funds, and other affiliated entities which
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;
. becoming internally advised (1) by acquiring the Advisor, (2) by
acquiring an unaffiliated third-party advisor, (3) by hiring the current
management of the Advisor or (4) by hiring new management;
. acquiring the CNL Restaurant Financial Services Group;
. acquiring CAS, an affiliate of the Advisor that performs investment
advisory services;
. acquiring CNL Restaurant Development, Inc., an affiliate of the Advisor,
which 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
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investment banking firms that would potentially represent APF in the
implementation of any strategic alternative to two, Merrill Lynch & Co. 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 being an independent member of APF's
Board of Directors having no financial interest in the implementation of any
strategic alternative, except, in Mr. Hostetter's case, by virtue of his
beneficial ownership of APF Shares.
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.
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.
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.
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 the
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 management, Shaw
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Pittman, Merrill Lynch and 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 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
the 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 also 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 of Directors evaluate
the feasibility of engaging in an underwritten public offering of APF Shares
concurrently with listing on the NYSE. 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 to provide
a fairness opinion to the Special Committee 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. After discussing the advantages and
disadvantages of each strategic alternative, the representatives selected the
acquisition of the Income Funds, CNL Income Funds XVII and XVIII and the Growth
Funds through the issuance of APF Shares in a transaction taxable to the
Limited Partners of the Income Funds and the Growth Funds. The remaining
portions of the meetings during the week of September 7, 1998 dealt primarily
with valuation techniques and
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methodologies of the Income Funds, CNL Income Funds XVII and XVIII and the CNL
Restaurant Businesses and the timelines and responsibilities of each of the
representatives.
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 acquisitions. 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 of the Income Funds, CNL
Income Funds XVII and XVIII and 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 such 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 and 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 and accounting advisors and the 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, certain assets of the Growth
Funds 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 their acquisition through the issuance of APF
Shares in a taxable transaction, 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 of
the Income Funds and CNL Income Funds XVII and XVIII, 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 of Directors. At such time, the members of the Special Committee
unanimously recommended to the full Board that the Board approve such
acquisitions 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 $20.00 price per APF Share. The members of the full Board unanimously
approved the Special Committee's recommendation.
On December 1, 1998, APF presented 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 $20.00 price per APF Share.
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On January 27, 1999, the Special Committee of the Board of Directors
received a counter-offer from the General Partners 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 to 30,500,000 APF Shares
based on the $20.00 price per APF Share. After discussing the proposed counter-
offer, the Special Committee unanimously agreed to accept the 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 $20.00 price per APF Share.
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 acquisitions of the Income Funds and CNL Income Funds XVII
and XVIII were fair to APF from a financial point of view. The fairness
opinions are attached as Exhibit D-1 and Exhibit D-2, respectively, to the
Proxy Statement.
On March 11, 1999, APF entered into definitive acquisition agreements 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 5, 1999, four limited partners in several Income Funds filed 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, alleging that the
Messrs. Seneff and Bourne and CNL Realty Corporation, as General Partners of
the Income Funds and CNL Income Funds XVII and XVIII, breached their fiduciary
duties and violated the provisions of certain of the partnership agreements of
the Income Funds and CNL Income Funds XVII and XVIII in connection with the
proposed acquisition of such funds. The plaintiffs are seeking unspecified
damages. In addition, the plaintiffs are seeking equitable relief that would
enjoin the proposed acquisitions.
On May 11, 1999, APF was served with a copy of the complaint for the
lawsuit.
On May 13, 1999, APF retained Shaw Pittman to represent its interests in the
recently filed lawsuit.
On May 19, 1999, representatives of APF's management, Shaw Pittman and the
General Partners of the Income Funds, met to discuss concerns regarding the
proposed acquisitions. Messrs. Seneff and Bourne, in their capacity as General
Partners of the Income Funds, 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 complaints, Messrs.
Seneff and Bourne discussed the possibility of potentially restructuring the
acquisition of such funds in a manner to permit the limited partners in CNL
Income Funds XVII and XVIII to retain passive income treatment. In light of
Messrs. Seneff and Bourne's 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 certain
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
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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 units of
limited partnership interest 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 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 Income
Funds XVII and XVIII out of the acquisition of the other Income Funds
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 of 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 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
of 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
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.
Messrs. Seneff and Bourne 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. Messrs.
Seneff and Bourne 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 Messrs. Seneff and Bourne 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 value of
the APF Shares the investor would have received had such investor not voted
against the Income Fund acquisitions. 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.
Messrs. Seneff and Bourne accepted APF's offer to change the terms of the
notes.
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On June 1, 1999, Messrs. Seneff and Bourne, 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 Messrs. Seneff and Bourne's concerns regarding
protection of passive income treatment and APF's concerns regarding delaying
the acquisition of any of the Income Funds or negatively impacting the vote of
the other Income Funds as a result of CNL Income Funds XVII and XVIII.
On June 3, 1999, Messrs. Seneff and Bourne, on behalf of CNL Income Funds
XVII and XVIII, and APF agreed that it would be in the best interests of CNL
Income Funds XVII and XVIII and APF that APF not attempt to acquire these
Income Funds at the present time. Notwithstanding this agreement,
representatives of APF stated that they would, depending on market conditions,
seek to acquire CNL Income Funds XVII and XVIII after APF 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 the General
Partners for CNL Income Funds XVII and XVIII.
On June 22, 1999, a Limited Partner of several Income Funds filed a lawsuit
against the General Partners and APF, Ira Gaines, individually and on behalf of
a class of persons similarly situated, v. CNL American Properties Fund, Inc.,
James M. Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, CNL Fund
Advisors, CNL Financial Corporation a/k/a CNL Financial Corp., CNL Financial
Services, Inc. and CNL Group, Inc., Case No. CIO 99-3796, in the Circuit Court
of the Ninth Judicial Circuit of Orange County, Florida, alleging that the
General Partners breached the General Partners' fiduciary duties and that APF
aided and abetted the General Partners' breach of fiduciary duties in
connection with the Income Fund acquisitions. The plaintiff is seeking
unspecified damages. In addition, the plaintiff is seeking equitable relief
that would enjoin the proposed acquisitions.
On June 29, 1999, the Board of Directors of APF met and accepted the
recommendation from APF's management that APF should not acquire CNL Income
Funds XVII and XVIII. 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 $20.00 price per APF Share.
On June 29, 1999, Merrill Lynch re-delivered its fairness opinion as of
February 10, 1999, revised to reflect the removal of CNL Income Funds XVII and
XVIII from the acquisition of the Income Funds.
Recommendation on the CNL Restaurant Business Acquisition
In reaching its conclusion that the acquisition of the CNL Restaurant
Businesses is in the best interests of APF and its stockholders, the Special
Committee considered, but did not assign relative weight to, the following
factors, each of which it believes weighs in favor of the CNL Restaurant
Business acquisition:
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. the belief of the Special Committee that the addition of internal
development and increased financing capabilities would enhance the
competitive position of APF by enabling APF to offer comprehensive site
services to its tenants and clients;
. the ability of APF to control key functions that are important to the
growth of its business by acquiring the CNL Restaurant Businesses;
. the proven expertise and substantial experience of the employees of the
Advisor and the CNL Restaurant Financial Services Group who will become
employees of APF as a result of the CNL Restaurant Business acquisitions
and the long-standing relationships of such employees with significant
tenants of APF and other operators of national and regional restaurant
chains;
. the opportunity to mitigate certain perceived conflicts of interest
between APF and its stockholders, on the one hand, and the stockholders
and employees of the Advisor and the CNL Restaurant Financial Services
Group, on the other hand, by more closely aligning the interests of such
stockholders and employees with those of APF's stockholders;
. the belief of the Special Committee that the CNL Restaurant Business
acquisitions will enable APF to realize long-term cost savings from a
self-managed structure in that it will itself perform the management,
acquisition and development services that it currently pays the Advisor
to perform, thereby enabling APF to both eliminate the profits that were
previously being realized by the Advisor for providing such services and
potentially allowing APF to raise additional equity in the future
without proportionately increasing the fees paid to the Advisor or
another external advisor;
. the Special Committee's belief that an internally-advised structure will
make APF more attractive to investors and will enhance its perception in
the market;
. the Special Committee's belief that the principal alternatives available
to APF would not be as beneficial to APF and its stockholders as the CNL
Restaurant Business acquisitions; in particular, the Special Committee
believes that (1) independently developing securitization capabilities
and expanding APF's mortgage lending capabilities would be more costly
and time-consuming than acquiring the CNL Restaurant Financial Services
Group, (2) terminating the existing advisory agreement between APF and
the Advisor would cause a significant disruption in APF's affairs and
(3) renegotiating the compensation formula contained in the existing
advisory agreement, even if successful, would not eliminate the
perceived conflicts of interest; and
. the Special Committee's belief that the consideration to be paid for the
CNL Restaurant Businesses is fair to APF from a financial point of view
based on the factors set forth below.
In reaching its conclusion that the consideration to be paid for the CNL
Restaurant Businesses is fair to APF from a financial point of view, the
Special Committee considered, but did not assign relative weight to, the
following factors:
. the existing conflicts of interest between APF and its external
management team, including the Principals, as well as the steps taken,
such as the creation of the Special Committee and the securing of a
fairness opinion from Merrill Lynch, to ensure that the CNL Restaurant
Business acquisitions would not be affected by such conflicts;
. the terms and conditions of the Merger Agreements for the CNL Restaurant
Business acquisitions, including the type, amount and timing of
consideration to be paid to the stockholders of the CNL Restaurant
Businesses; and
. the oral presentation of Merrill Lynch to the Special Committee on
February 10, 1999 and the written opinion of Merrill Lynch to the
Special Committee as of February 10, 1999 stating that on such date and
based upon the assumptions made, matters considered and limits of review
set forth therein, the consideration to be paid by APF for the
acquisition of the CNL Restaurant Businesses is fair to APF from a
financial point of view.
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The Special Committee also took into account the effect the payment of the
consideration for the CNL Restaurant Businesses would have on APF's results
from operations. The Special Committee estimated, in light of the anticipated
growth of APF's portfolio, that the CNL Restaurant Business acquisitions would
be more accretive to APF shareholders than would be the case under the same
assumptions if the CNL Restaurant Business acquisitions did not occur.
The Special Committee reviewed and considered internal management
projections for the three-year period from 1999 through 2001 regarding
management, acquisition and development activities, anticipated initial
acquisition yields and operating expenses under varying acquisition pace
scenarios and under the presumption that the CNL Restaurant Business
acquisitions would be consummated as well as under the presumption that the
existing advisory agreement between APF and the Advisor and other relationships
with the CNL Restaurant Businesses remained in place. These projections
indicated that the acquisitions of the CNL Restaurant Businesses will be
accretive to APF's FFO per share in 1999, 2000 and 2001.
There can be no assurance that these projections will be met and that the
assumptions relating to property acquisitions, development, equity capital,
pre-merger cap rates, interest rates and dividends, on which such projections
are based, are materially accurate. In addition, certain known and unknown
risks, uncertainties and other factors may cause actual results, performance or
achievements of APF with respect to the CNL Restaurant Business acquisitions to
be materially different from the projected results. Accordingly, there can be
no assurance that the CNL Restaurant Business acquisitions will be accretive to
APF's FFO per share should these projections and assumptions materially differ
from future results.
Recommendation on the Income Fund Acquisitions
In reaching its conclusion that the Income Fund acquisitions are in the best
interests of APF and its stockholders, the Special Committee considered, but
did not assign relative weight to, the following factors, each of which it
believes weighs in favor of the Income Fund acquisitions:
. the belief that the Income Fund acquisitions and concurrent listing of
the APF Shares on the NYSE will meet the expectation of stockholders of
enhanced liquidity and permit APF to consummate future transactions
using equity as consideration;
. the belief that the Income Fund acquisitions present a unique
opportunity for APF to acquire a portfolio of restaurant properties
similar to those already owned by APF, increasing its size much more
rapidly than through its traditional means of acquiring one restaurant
property at a time and that APF's enhanced size will increase the
interest of institutional investors and research analysts in APF;
. the belief that the Income Fund acquisitions and listing of the APF
Shares on the NYSE will facilitate APF becoming internally advised
because the increase in the size of APF's asset base as a result of the
Income Fund acquisitions will provide the economies of scale needed to
support more efficiently the extensive general and administrative
expenses of an in-house acquisition, development, management and
financing team;
. the belief of the Special Committee that the principal alternatives
available to APF would not be as beneficial to APF and its stockholders
as the transactions contemplated by the Income Fund acquisitions and
listing of the APF Shares on the NYSE; in particular, the Special
Committee believes that maintaining APF's status quo would not enhance
liquidity for stockholders, listing of the APF Shares on the NYSE
without consummating the Income Fund acquisitions may impede APF's
ability to grow and the sale of APF for cash or stock of a public
company would produce an inferior return for APF stockholders; and
. the Special Committee's belief that the consideration to be paid for the
Income Funds is fair to APF from a financial point of view based on the
factors set forth below.
In reaching its conclusion that the Income Fund acquisitions are in the best
interests of APF and its stockholders, the Special Committee also considered,
but did not assign relative weight to, the following
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factors. Although the Special Committee viewed these as potentially negative
factors with respect to the Income Fund acquisitions, it believed these factors
to be outweighed by the positive factors set forth above:
. the likelihood that the solicitation and filing processes relating to
the Income Fund acquisitions will be time-consuming and costly; and
. the awareness that listing of the APF Shares on the NYSE will subject
APF to market risks in subsequent attempts to raise capital and may
result in negative recommendations by research analysts if APF fails to
meet performance projections.
In reaching its conclusion that the consideration to be paid for the Income
Funds is fair to APF from a financial point of view, the Special Committee
considered, but did not assign relative weights to, the following factors:
. the existing conflicts of interest between APF and the Principals and
other affiliates of CNL Group, Inc., as well as the steps taken, such as
the creation of the Special Committee and the securing of a fairness
opinion from Merrill Lynch, to ensure that the Income Fund acquisitions
would not be affected by such conflicts; and
. the oral presentation of Merrill Lynch to the Special Committee by
Merrill Lynch on February 10, 1999 stating that on such date and based
upon the assumptions made, matters considered and limits of review set
forth therein, the consideration to be paid by APF in the Income Fund
acquisitions is fair to APF from a financial point of view.
Fairness Opinions of Merrill Lynch to the Special Committee with respect to the
CNL Restaurant Businesses and the Income Funds
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 assured that an
aggregate of 54,686,486 APF Shares would be issued in the acquisition of the
Income Funds 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 reduces 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 information set forth in this section by two in order to provide for a
meaningful comparison.
Opinion of the Special Committee's Financial Advisor
In connection with the Special Committee's consideration of the acquisition
of the Income Funds and the CNL Restaurant Businesses, 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 Proxy Statement as Exhibit D-1 and Exhibit D-2, respectively.
The descriptions of the fairness opinions set forth herein are summaries of our
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 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
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Businesses, when viewed together as a single transaction, and the Income Fund
acquisitions, when viewed together as a single transaction. The fairness
opinions do not address the merits of the underlying decisions by APF to engage
in such acquisitions. The fairness opinions do not constitute, nor should they
be construed as, a recommendation to any stockholder of APF as to how such
stockholder should vote on any matter presented to such stockholder, including
any matter presented in this Proxy Statement.
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 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 acquisition of the Income
Funds and the CNL Restaurant Businesses.
In preparing the CNL Restaurant Businesses fairness opinion, Merrill Lynch,
among other things:
(1) Reviewed certain publicly available business and financial
information relating to the CNL Restaurant Businesses and APF that it
deemed to be relevant,
(2) Reviewed certain 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 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 acquisition of the Income Funds and the CNL Restaurant Businesses
expected synergies,
(4) Reviewed valuation multiples of certain 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 certain other
comparable transactions that it deemed to be relevant,
(6) Participated in certain 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 certain publicly available business and financial
information relating to the Income Funds and APF that it deemed to be
relevant,
(2) Reviewed certain 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 of the Income Funds, furnished to it by the management team of
APF and the General Partners,
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(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, the General Partners 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 acquisition of the Income Funds and the Income Funds
expected synergies,
(5) Reviewed valuation multiples of certain 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 of the
Income Funds with the financial terms of certain other comparable
transactions that it deemed to be relevant,
(7) Participated in certain discussions among representatives of the
Income Funds, APF, the General Partners, their financial and legal advisors
and our financial and legal advisors,
(8) Reviewed the potential pro forma impact of the acquisition of the
Income Funds including the Income Funds' expected synergies,
(9) Reviewed drafts of the Merger Agreements relating to the acquisition
of the Income Funds, 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 judgement of the
respective management teams of the CNL Restaurant Businesses, the General
Partners 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 for
the Income Funds and the CNL Restaurant Businesses 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 of the Proxy Statement.
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
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the fairness opinions. Merrill Lynch assumed that in the course of obtaining
the necessary consents or approvals (contractual or otherwise) for any of the
acquisitions, no restrictions would be imposed that will have a material
adverse effect on the contemplated benefits of such 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 of the
Income Funds 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 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 (1) the completion of the Income
Fund 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 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 the General Partners' 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 acquisitions of the Income Funds
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 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
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 certain financial
and operating information and ratios and projected financial performance for
the Advisor and the CNL Restaurant Financial
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Services Group, which the Advisor acquired in 1998, and CNL Financial Services,
Inc. 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.
Merrill Lynch's comparisons resulted in the following relevant ranges for
the real estate services comparable companies as of February 5, 1999: (1) 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; (2) 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; (3) 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; (4) a range of share price as a multiple of
estimated 1998 EPS of 9.1x to 25.4x, with a mean of 15.3x and a median of
11.4x; (5) a range of share price as a multiple of estimated 1999 earning per
share, or EPS, of 7.5x to 24.2x, with a mean of 14.5x and a median of 9.7x; (6)
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 (7) 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: (1) 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; (2) 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; (3) 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; (4) 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 16.3x; and (5) 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 1998 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: (1) 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; (2) 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; (3) a share price as a multiple of
estimated 2000 EPS of 6.8x; and (4) five-year compounded annual growth rates in
FFO of 18.0% to 20.0%, with a mean of 19.3% and a median of 20.0%.
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%.
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By applying what Merrill Lynch considered to be the relevant range of
multiples to the CNL Restaurant Financial Services Group's 1999 projected net
income, this analysis yielded an implied range of values for the 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 the 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 certain publicly available information regarding certain 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 certain 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: (1) 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; (2)
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; (3) 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 (4) 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 Advisor's management. Utilizing these projections,
Merrill Lynch calculated a range of total equity values for the Advisor based
upon the present value of on the sum of (a) the Advisor's free cash flows from
1999 through 2003 and (b) the present value of the terminal value of 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 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 Restaruant Financial Services Group based upon financial
projections provided by the CNL Restaruant Financial Services
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Group's management. Utilizing these projections, Merrill Lynch calculated a
range of total equity value for the CNL Restaruant Financial Services Group
based upon the present value of the sum of (a) the CNL Restaruant Financial
Services Group's free cash flows from 1999 through 2003 and (b) the present
value of the terminal value of the CNL Restaruant Financial Services Group in
2003 calculated utilizing a range multiples times the CNL Restaruant 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 Restaruant Financial Services Group in a range from
$20.5 million and $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 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 (see APF discussion
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 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 (56 sales occurring from
January 1997 through December 1998). These sales indicated a mean
capitalization rate of 9.7% and a median capitalization rate of 9.5% (seven
sales with capitalization rates above 14% were excluded from the mean and
median calculations). In addition, Merrill Lynch interviewed
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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
of the Income Funds, including the potential impact on APF's projected FFO per
share and the anticipated accretion/dilution to APF's FFO per share resulting
from such acquisitions. Merrill Lynch observed that, after giving effect to the
acquisition of the Income Funds, inclusive of cost savings, such acquisitions
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 (see APF discussion 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.
Relative Discounted Cash Flow Analysis -- Income Funds
Utilizing the discounted cash flow analyses performed on a stand-alone basis
for APF (see APF discussion 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 certain
financial and operating information for APF on a standalone 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
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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 determinatrion with
respect to the acquisition of CNL Restaurant Businesses or the Income Fund
acquisitions, 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.
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
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
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 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 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
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 Special Committee as consideration for the rendering of the fairness
opinions, and if reasonably requested by APF prior to consummation of the
acquisition of the Income Funds, 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 certain affiliated persons against
certain 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 certain 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
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retained (1) in June 1998 by APF to act as financial advisor in connection with
the review of certain 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 certain 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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SELECTED HISTORICAL FINANCIAL DATA OF APF
The following table sets forth certain financial information for APF, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations of APF" and the Financial
Statements included elsewhere in this Consent Solicitation. The per share data
in the table reflects a one-for-two reverse stock split effective as of June 3,
1999.
<TABLE>
<CAPTION>
May 2, 1994
(Date of
Quarter Ended Inception)
March 31, Year Ended December 31, through
------------------------- -------------------------------------------------- December 31,
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 14,398,771 $ 8,327,804 $ 42,187,037 $ 19,457,933 $ 6,206,684 $ 659,131 --
Net earnings............ 10,490,297 6,520,029 32,152,408 15,564,456 4,745,962 368,779 --
Cash distributions (1).. 14,237,405 7,281,343 39,449,149 16,854,297 5,436,072 638,618 --
Earnings per APF Share.. 0.28 0.33 1.21 1.33 1.18 0.39 --
Cash distributions
declared per APF
Share.................. 0.38 0.38 1.52 1.49 1.41 0.62 --
Weighted average number
of APF Shares
outstanding (2)........ 37,347,401 19,620,436 26,648,219 11,711,934 4,035,835 949,175 --
<CAPTION>
March 31, December 31,
------------------------- ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $708,694,145 $394,757,976 $680,352,013 $339,077,762 $134,825,048 $33,603,084 $929,585
Total stockholders'
equity................. 657,085,021 379,958,008 660,810,286 321,638,101 122,867,427 31,980,648 200,000
</TABLE>
- --------
(1) Approximately 26%, 10%, 18%, 8%, 13% and 42% of cash distributions ($0.10,
$0.04, $0.28, $0.11, $0.18 and $0.26 per APF Share) for the quarter ended
March 31, 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. Cash distributions treated as a
return of capital on a GAAP basis represent the amount of cash
distributions in excess of accumulated net earnings 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
The following discussion relates to APF's financial condition and results of
operations as of March 31, 1999. Accordingly, it does not reflect the
acquisition of the CNL Restaurant Businesses.
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.
Certain factors that might cause such a difference include the following:
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, 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.
Given these uncertainties, readers are cautioned not to place undue reliance on
such statements. APF undertakes no obligation to update these forward-looking
statements to reflect any future events or circumstances.
Overview
APF provides real estate financing to operators of national and regional
restaurant chains primarily through triple-net lease financing. As of March 31,
1999, APF had invested the $670 million it received from net offering proceeds
from three separate public offerings of common stock, in 513 restaurant
properties, diversified among 44 restaurant chains in 41 states.
The financial results for the quarter ended March 31, 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 Information Memorandum, 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 additional acquisition opportunities.
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<PAGE>
[MAC CHART APPEARS HERE]
(1) APF will operate as a holding company and will conduct its business through
CNL APF Partners, LP.
(2) Each of these entities was formed for purposes of holding the Advisor or
the CNL Restaurant Financial Services Group.
(3) CNL APF Partners, LP will hold the properties and net assets of the Income
Funds.
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<PAGE>
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 March 31, 1999, APF had received aggregate subscription
proceeds from its three offerings of approximately $750 million. As of March
31, 1999, APF had invested the aggregate net offering proceeds to acquire 513
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 million with lenders. The credit facility will be used by APF
to fund construction and renovation costs relating to the restaurant properties
under construction at March 31, 1999, to acquire and develop additional
restaurant properties, and to fund additional mortgage loans and secured
equipment leases. In conjunction with obtaining the credit facility, APF
terminated and repaid the balance of approximately $12.6 million under the
previous line of credit. The interest rate on advances under the credit
facility are determined according to (1) a tiered rate structure up to a
maximum rate of 200 basis points above LIBOR, based upon APF's overall leverage
ratio, or (2) the lender's prime rate plus 0.25%, whichever APF selects at the
time of the advance. APF obtained advances of $34.2 million from this credit
facility in March 1999. The interest rate on the outstanding balance at March
31, 1999 was 6.69%. 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
maturity 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 credit facility on March 22,
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 March 31, 1999.
Subsequent to March 31, 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 certain
acquisition expenses.
At March 31, 1999 and December 31, 1998, APF had $37.8 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 quarter ended March 31, 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.
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APF expects to meet its long-term liquidity requirements through short or
long-term, unsecured or secured debt financing or equity financing. As of March
31, 1999, APF's only long-term liquidity requirement is the maturity of its
credit facility in March 2002.
During the quarters ended March 31, 1999 and 1998, and the years ended
December 31, 1998, 1997 and 1996, APF generated cash from operations of $13.6
million, $8.3 million, $39.1 million, $17.1 million and $5.5 million,
respectively. Based primarily on current and anticipated future cash from
operations, APF declared and paid distributions to its stockholders of $14.2
million, $7.3 million, $39.4 million, $16.9 million and $5.4 million, during
the quarters ended March 31, 1999 and 1998, and the years ended December 31,
1998, 1997 and 1996, respectively. This represented an annualized distribution
rate of 7.625% for each of the quarters ended March 31, 1999 and 1998.
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.
APF has 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 6.15 million 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 certain conditions,
including approval by APF'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 5, 1999, four Limited Partners in several Income Funds filed a
lawsuit against the General Partners and APF in connection with the proposed
acquisition of the Income Funds. The plaintiffs are alleging that the General
Partners breached their fiduciary duties and violated the provisions of certain
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. The General Partners and management of APF
believe that the lawsuit is without merit and intend to defend vigorously
against such claims. In addition, on June 22, 1999, a Limited Partner of
several Income Funds filed a lawsuit against the General Partners and APF
alleging that the General Partners breached their fiduciary duties and that APF
aided and abetted their breach of fiduciary duties in connection with the
Income Fund acquisition. The plaintiff is seeking unspecified damages and
equitable relief. The General Partners and the management of APF believe that
the lawsuit is without merit and intend to defend vigorously against such
claims. Because the lawsuits were so recently filed, it is premature to further
comment on the lawsuits at this time.
Results of Operations
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
APF's revenues increased 73% for the quarter ended March 31, 1999 as
compared to the same period in 1998. Revenues increased $6.1 million primarily
as a result of the acquisition of restaurant properties and funding of mortgage
loans totalling $110 million during the quarter ended March 31, 1999, compared
to $15 million for the same period in 1998. APF continues to focus on providing
net-lease and mortgage financing to restaurant chains and top franchisees in
certain restaurant systems. As of March 31, 1999, approximately 88% of APF's
tenants were either the franchisor or top five franchisee in a particular chain
based on sales. Weighted average base lease rates and mortgage rates on the new
investments were 9.84% for the quarter ended March 31, 1999 as compared to
10.36% for the corresponding period in 1998. APF's growth has resulted in
increased chain diversification as APF's tenants and borrowers include 44
restaurant chains compared to 29 at March 31, 1998. In addition, APF's
restaurants properties are geographically dispersed among 41 states at March
31, 1999, versus 35 states at March 31, 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
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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 quarter ended March 31, 1999, APF re-
leased two of the restaurant properties to new tenants. In April 1999, APF sold
one of the restaurant properties to a third party, as described above, and
intends to reinvest the net sales proceeds in an additional restaurant
property. 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 May 5, 1999, of the 29 restaurant properties remaining in APF's
portfolio relating to these tenants, excluding the restaurant property sold in
April 1999, described above, two restaurant properties had been re-leased to
new tenants, as described above, ten 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 ten 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 ten restaurant properties with
rejected leases to existing and prospective clients and local and regional
restaurant operators.
During the quarter ended March 31, 1999, one of APF's lessees, S & A
Restaurant Properties Corp., 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 event that certain lessees, borrowers or restaurant chains contribute 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
$3.7 million for the quarter ended March 31, 1999 compared to $1.8 million for
the quarter ended March 31, 1998. The increase in expenses was a function of a
larger restaurant property portfolio.
Approximately 88% 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
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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 certain lessees, borrowers or restaurant
chains contribute 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.
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
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. As of March 31, 1999, APF did not have any
information or non-information technology systems. The Advisor and its
affiliates provide all services requiring the use of information and non-
information technology systems pursuant to its advisory agreement with APF. The
information technology system of the Advisor and its affiliates consists of a
network of personal computers and servers built using hardware and software
from mainstream suppliers. The non-information technology systems of the
affiliates of the Advisor are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. The Advisor and its affiliates have no internally generated
programmed software coding to correct, because substantially all of the
software utilized by the Advisor and its affiliates is purchased or licensed
from external providers. The maintenance of non-information technology systems
at APF's restaurant properties is the responsibility of the tenants of the
restaurant properties in accordance with the terms of APF's leases.
In early 1998, the Advisor and affiliates formed a Year 2000 team for the
purpose of identifying, understanding and addressing the various issues
associated with the Year 2000 problem. The Y2K team consists of members from
the Advisor and its affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K team's initial step in assessing
APF's Year 2000 readiness consists of identifying any systems that are date
sensitive and, accordingly, could have potential Year 2000 problems. The Y2K
team is in the process of conducting inspections, interviews and tests to
identify which of APF's systems could have a potential Year 2000 problem.
The information system of the Advisor and its affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K team is in the process of contacting the
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<PAGE>
respective vendors and manufacturers to verify the Year 2000 compliance of
their products. In addition, the Y2K team has requested and is evaluating
documentation from other companies with which APF has a material third party
relationship, including APF's tenants, borrowers, vendors, financial
institutions and APF's transfer agent. APF depends on its tenants and borrowers
for rents, interest and cash flows, its financial institutions for availability
of cash and financing and its transfer agent to maintain and track investor
information. The Y2K team has also requested and is evaluating documentation
from the non-information technology systems providers of the Advisor and its
affiliates. Although the Advisor continues to receive positive responses from
the companies with which APF has third party relationships regarding their Year
2000 compliance, the Advisor cannot be assured that the tenants, borrowers,
financial institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. The Advisor is not able to
measure the effect on the operations of APF of any third party's failure to
adequately address the impact of the Year 2000.
The Advisor and its affiliates have identified and have implemented upgrades
for certain hardware equipment. In addition, the Advisor and its affiliates
have identified certain software applications which will require upgrades to
become Year 2000 compliant. The Advisor expects all of these upgrades as well
as any other necessary remedial measures on the information technology systems
used in the business activities and operations of APF to be completed by
September 30, 1999, although the Advisor cannot be assured that the upgrade
solutions provided by the vendors have addressed all possible Year 2000 issues.
The Advisor does not expect the aggregate cost of the Year 2000 remedial
measures, which will be incurred by the Advisor, to be material to the results
of operations of APF.
The Advisor and affiliates have received certification from APF's transfer
agent of its Year 2000 compliance. Due to the material relationship of APF with
its transfer agent, the Y2K team is evaluating the Year 2000 compliance of the
systems of the transfer agent and expects to have the evaluation completed by
September 30, 1999. Despite the positive response from the transfer agent and
the evaluation of the transfer agents system by the Y2K team, the Advisor
cannot be assured that the transfer agent has addressed all possible Year 2000
issues. In the event that the systems of the transfer agent are not Year 2000
compliant, the Advisor would have to allocate resources to internally perform
the functions of the transfer agent. The Advisor does not anticipate that the
additional cost of these resources, which will be incurred by the Advisor,
would have a material impact on the financial results of the Advisor or APF.
Based upon the progress the Advisor and affiliates have made in addressing
the Year 2000 issues and their plan and timeline to complete the compliance
program, the Advisor does not foresee significant risks associated with Year
2000 compliance at this time. The Advisor plans to address all significant Year
2000 issues prior to APF being affected by them; therefore, it has not
developed a comprehensive contingency plan. However, if the Advisor identifies
significant risks related to Year 2000 compliance or if its progress deviates
from the anticipated timeline, the Advisor will develop contingency plans as
deemed necessary at that time.
APF does not believe that the acquisition of the CNL Restaurant Businesses,
including the costs of becoming Year 2000 compliant, will have a material
impact on APF's Year 2000 readiness or on its results of operations.
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<PAGE>
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 March
31, 1999 approximated the outstanding 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 March 31, 1999:
<TABLE>
<CAPTION>
Mortgage and
equipment notes Certificates
--------------- -------------------------
Fixed
Fixed Rates Rates Floating Rates
--------------- ---------- --------------
<S> <C> <C> <C>
1999.................................. $ 3,728,000 $ 0 $ 0
2000.................................. 6,069,262 0 0
2001.................................. 2,400,141 0 0
2002.................................. 2,655,617 0 0
2003.................................. 3,011,702 0 0
Thereafter............................ 22,675,169 9,514,215 6,568,839
----------- ---------- ----------
$40,539,891 $9,514,215 $6,568,839
=========== ========== ==========
</TABLE>
Future Business Plans
Subsequent to consummating the Income Fund 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 Income Fund acquisition is completed in the fourth quarter of
1999, APF anticipates a public offering of APF Shares either contemporaneously
with or shortly after completing such 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, APF is currently
negotiating a credit facility with a third party, which will serve as APF's
primary warehouse facility 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 certain non-related
classes of the securitizations which 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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<PAGE>
APF'S BUSINESS AND THE RESTAURANT PROPERTIES
APF's Business
General
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 Corp.,
Foodmaker, Inc., Golden Corral Corporation, IHOP, and Chevy's Inc.
Since APF's inception in 1994 through March 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 March 31, 1999
and assuming the completion of the acquisition of the CNL Restaurant
Businesses, APF's portfolio consisted of investments in 1,113 restaurant
properties. Of these restaurant properties APF has provided triple-net lease
financing for 513 restaurant properties, mortgage financing on 312 restaurant
properties, and holds a securitized mortgage interest in 288 properties. APF
also held title to the equipment, such as kitchen and dining room fixtures and
food preparation appliances directly related to the restaurant property, on
approximately 3% of these restaurant properties as of March 31, 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,
a full-service REIT, 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 43 states as of March 31, 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 400 East South Street, Orlando,
Florida 32801, telephone number (407) 650-1000.
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<PAGE>
Business Objectives and Strategies
The following paragraphs describe the business objectives and strategies
that APF currently employs and those that it will be able to employ as a result
of the acquisition of the CNL Restaurant Businesses and the Income Funds. APF
believes that these business objectives and strategies will enhance its
financial position and increase results of operations.
. Providing a full range of real estate development and financing services
to operators of national and regional restaurant chains. As a result of
the CNL Restaurant Business acquisitions, APF will be structured as a
"one-stop shop" for real estate services and financial products that will
allow the operators of national and regional restaurant chains to
concentrate on their core business of operating restaurants. APF will
provide 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 will be able to
provide 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 will seek 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. The acquisition of the Advisor also will
provide APF with a strategic alliance with CAS through which it will have
a right of first refusal to provide financing for restaurant properties
in connection with any merger or acquisition with respect to which CAS is
providing advisory services. See "-- Strategic Alliance with CNL Advisory
Services, Inc.," below.
. 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. 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. Because they are more likely to remain
financially stable even when certain of their restaurants are
unprofitable or underperforming, the larger restaurant chain operators to
which APF has provided or will provide real estate development and
financing services are 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. As of March 31, 1999, 88% of APF's tenants were
either the franchisor or the top five franchisees based on sales of the
particular restaurant chain. Typically, multi-unit restaurant operators
are the most stable industry credits, providing better risk-adjusted
returns for stockholders.
. Structuring for long-term, stable cash flows. APF's restaurant properties
generally are leased on a long-term basis, generally 15-20 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 the organizational
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<PAGE>
documents or management agreement of the property without prior written
consent of APF. The fixed charge coverage ratio is calculated by dividing
the earnings before interest, taxes, depreciation and amortization, or
EBITDA, and adding back in rent obligation, by the debt service.
Therefore, in order to have a fixed charge coverage ratio of 1.2, a
borrower must have $1.20 in EBITDA plus the rent obligation, for every
$1.00 of debt service. A borrower's failure to meet its fixed charge
coverage ratio is a technical, 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
will be 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 will allow APF to
develop strategic relationships with operators of national and regional
restaurant chains which, in turn, lead to a steady pipeline of restaurant
property acquisition and development opportunities. This pipeline will be
further enhanced by APF's strategic alliance with CAS, as described
above. 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.
. Applying proven underwriting standards. As the Advisor does now, APF will
perform extensive due diligence before investing in a restaurant property
and will apply strict conservative underwriting criteria to all potential
acquisitions and financings. APF will evaluate 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 will evaluate the financial strength of 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 March 31, 1999 and assuming the
acquisition of the CNL Restaurant Businesses, APF's real estate
investments are comprised of 1,113 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 43 states as of March 31, 1999.
Restaurant Chain Diversification. APF's portfolio contains
restaurant properties operated by many different restaurant chains. As
of March 31, 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
March 31, 1999, 88% of APF's tenants were the franchisor or the top
five franchisees of a particular restaurant chain based on sales.
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.
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<PAGE>
. Managing and Monitoring Investments. As a result of the acquisition of
the Advisor, APF will assume responsibility for its day-to-day
operations, including actively managing its restaurant property portfolio
and administering its investments. APF will monitor property level issues
including restaurant sales, real estate taxes, assessments and insurance
payments and will actively analyze diversification, review
tenant/borrower financial statements and restructure investments in the
case of underperforming and non-performing investments. APF believes that
the Advisor's active management of APF's investments is responsible, in
large part, for the high tenant occupancy rate for APF's restaurant
properties. As of March 31, 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 debt-to-total assets ratio of less than 45%.
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 certain 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. The acquisition of the CNL Restaurant Businesses and the Income
Funds will position APF as one of the largest REITs in the United States
providing financing to the restaurant industry and restaurant property
services. 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
will enable 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. APF's UPREIT structure with the Operating Partnership also
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 will enhance 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 will 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 CAS, will provide APF with a competitive advantage in the
restaurant finance business.
. Experienced Management. APF's acquisition of the CNL Restaurant
Businesses will provide it with a senior management team with an average
of more than 17 years of experience in developing and operating
restaurant properties and in real estate finance and capital markets. APF
believes that this management team, which will become APF's management
team following the CNL Restaurant Business acquisitions, has a
specialized ability to invest in and manage restaurant real estate that
will decrease APF's investment risk and enhance stockholders' returns.
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<PAGE>
Strategic Alliance with CNL Advisory Services, Inc.
As part of its acquisition of the Advisor, APF will assume the Advisor's
rights and obligations under a strategic alliance the Advisor entered into with
CNL Advisory Services, Inc., or CAS, 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 between CAS and the Advisor, APF has a right of first refusal to
provide financing for restaurant properties in connection with any merger or
acquisition with respect to which CAS is providing advisory services. APF did
not attempt to acquire CAS because the income generated by CAS does not qualify
under the gross income tests for a REIT. APF believes, however, that the
agreement with CAS will generate additional financing opportunities for APF and
further enhance its relationships with operators of national and regional
restaurant chains.
APF's Restaurant Properties
Currently Owned Restaurant Properties. The following table provides certain
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
March 31, 1999.
<TABLE>
<CAPTION>
Percent of
Total Number of Average Age Total
Restaurant of Restaurant Annualized Total Rental
Restaurant Chain Properties Properties Rental Revenue(1) Revenue
- ---------------- --------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C>
Golden Corral........... 41 2.0 $ 5,393,000 10.1%
Jack in the Box......... 54 1.6 5,135,000 9.7
Bennigan's.............. 21 15.1 4,082,000 7.7
IHOP.................... 28 2.1 3,695,000 6.9
Burger King............. 32 12.0 3,443,000 6.5
Steak and Ale
Restaurant............. 20 20.7 3,399,000 6.4
Boston Market(2)........ 29 2.4 2,384,000 4.5
Darryl's................ 15 17.6 2,351,000 4.4
Arby's.................. 27 4.7 2,332,000 4.4
Applebee's.............. 14 3.9 2,222,000 4.2
Pollo Tropical.......... 11 4.7 1,780,000 3.3
Denny's................. 15 10.1 1,564,000 2.9
Black-eyed Pea.......... 26 4.5 1,542,000 2.9
Chevy's Fresh Mex....... 6 4.8 1,514,000 2.8
Ground Round............ 13 18.3 1,419,000 2.7
Sonny's Real Pit Bar-B-
Q...................... 7 12.1 893,000 1.7
Pizza Hut............... 44 15.5 776,000 1.5
Wendy's................. 9 2.0 760,000 1.4
Houlihan's.............. 3 25.0 577,000 1.1
Other................... 98 6.6 7,954,000 14.9
--- ----------- -----
Total................. 513 $53,215,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) Annualized revenue includes the straight-lining of rental income in
accordance with generally accepted accounting principles. Excludes original
base rental income of $1,014,000 attributable to 11 restaurant properties,
including the restaurant properties discussed in footnote 2, which have
terminated their leases.
(2) In October 1998, tenants of 29 Boston Market restaurant properties filed
voluntary petitions for bankruptcy under Chapter 11 of the U.S. Bankruptcy
Code. As of May 31, 1999, nine of these restaurant properties remain closed
one has been sold, and APF continues to receive lease payments on the
remaining 19 restaurant properties. APF is actively marketing these
restaurant properties for release or sale.
As of March 31, 1999, APF leased on a triple-net basis 513 restaurant
properties in 41 states and substantially all of the restaurant properties were
being leased. All nonperforming restaurant properties owned by APF are actively
being marketed for either re-lease or sale. Assuming that the acquisition of
the CNL
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<PAGE>
Restaurant Businesses, the Advisor and the Income Funds had occurred on March
31, 1999, APF would own 1,087 restaurant properties available for triple-net
leasing located in 45 states.
APF typically either acquires, owns and manages freestanding restaurant
properties leased to individual tenants 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 1,300 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. Buildings and site preparation costs
generally range from $178,000 to $1,680,000 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.
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<PAGE>
Restaurant Investments Following CNL Restaurant Business Acquisitions. If
APF had acquired the CNL Restaurant Financial Services Group as of March 31,
1999, APF's portfolio would have consisted of investments (which include
mortgage financings and securitizations) in 1,113 restaurant properties located
in 43 states. The following table sets forth certain information regarding the
geographic diversification of those investments, including mortgage financings
and securitizations, assuming the CNL Restaurant Financial Services Group had
been acquired as of March 31, 1999.
Regional Property Distribution
(as of March 31, 1999)
<TABLE>
<CAPTION>
Total Number of
Restaurant
Restaurant Chain Properties West Central South East
- ---------------- --------------- ---- ------- ----- ----
<S> <C> <C> <C> <C> <C>
Taco Bell............................. 132 0 29 36 67
Burger King........................... 104 13 19 37 35
Pizza Hut............................. 90 0 0 10 80
Applebee's............................ 79 16 0 42 21
Wendy's............................... 63 4 0 24 35
T.G.I. Friday's....................... 58 25 10 10 13
Jack in the Box....................... 54 27 27 0 0
Papa John's........................... 48 2 0 23 23
Golden Corral......................... 43 0 21 17 5
Bennigan's............................ 43 0 16 19 8
Ruby Tuesday's........................ 40 9 15 10 6
Arby's................................ 31 4 0 20 7
Boston Market......................... 29 6 10 3 10
IHOP.................................. 28 2 12 11 3
Denny's............................... 27 1 5 18 3
Black-eyed Pea........................ 26 8 16 1 1
Big Boy............................... 26 0 19 0 7
Steak and Ale Restaurant.............. 26 0 8 15 3
KFC................................... 18 0 0 11 7
Darryl's.............................. 15 0 0 14 1
Sonny's Real Pit Bar-B-Q.............. 15 0 0 15 0
Hardee's.............................. 14 0 0 14 0
Fazoli's.............................. 13 0 0 13 0
Ground Round.......................... 13 0 2 1 10
Pollo Tropical........................ 11 0 0 11 0
Shoney's.............................. 11 3 0 8 0
Tumbleweed Southwest Mesquite Grill &
Bar.................................. 7 0 0 7 0
Popeyes............................... 6 0 0 6 0
Chevy's Fresh Mex..................... 6 3 1 0 2
Del Taco.............................. 6 6 0 0 0
Houlihan's............................ 5 0 1 1 3
Other................................. 26 0 4 15 7
----- --- --- --- ---
1,113 129 215 412 357
===== === === === ===
</TABLE>
Restaurant Investments Following the Income Fund Acquisitions. Upon
completion of the Income Fund acquisitions, assuming that APF had acquired all
of the Income Funds as of March 31, 1999 and assuming consummation of the CNL
Restaurant Business acquisitions, APF would own and lease on a triple-net basis
1,687 restaurant properties located in 45 states and would have investments,
which include mortgage financings and securitizations, in 700 restaurant
properties.
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<PAGE>
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 8.5 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.
Since APF's inception, the Advisor has been responsible for evaluating
investment opportunities for APF. The Advisor has performed these services
generally through its departments that focus on various aspects of real
property investment. Following its acquisition of the Advisor, APF will perform
the services currently provided by the Advisor. It is expected that APF will
maintain the following departments established by the Advisor:
. Acquisitions. This department is responsible for originating new
investments with, and maintaining relationships within, the restaurant
chain industry. Through March 31, 1999, APF and the CNL Restaurant
Businesses originated, for APF or other affiliates, a total of $1.9
billion in triple net-leases and mortgage loans in the restaurant chain
industry. The total volume of investments by APF and the CNL Restaurant
Businesses has increased from $146 million in 1995 to $254 million in
1998. In analyzing potential restaurant property acquisitions and
investments, APF will carefully underwrite 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.
Tenant and Borrower Evaluation -- Each potential tenant or mortgagor is
subjected to an extensive evaluation of its credit, management, ranking
in the industry, operating history and profitability. The Advisor
seeks, and APF will continue to seek, clients who have established
credit. APF may also seek a letter of credit or guaranty of lease
obligations from the tenant's corporate parent providing additional
financial security.
Leases with Increasing Rents -- Generally, clauses are included in the
leases providing for increases in rent over the term of the leases. The
increases are scheduled rental increases, are a percentage of gross
sales above a specific level or are tied to indices such as the
consumer price index.
Lease Provisions that Protect Value -- As appropriate, the Advisor
attempts to include provisions in APF's leases that require its consent
to certain tenant activity 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 the Advisor's conservative underwriting has led to APF's
historically low default and loss experience.
The Advisor's investment committee, which APF intends to continue and
which is comprised of senior management, functions as a separate and
final step in the investment approval process. As part of the
underwriting process, the investment committee independently evaluates
each investment opportunity. As a transaction is structured, it is
evaluated for its expected financial returns, creditworthiness of the
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tenant, the real estate characteristics, guarantors or other collateral,
and the lease or mortgage loan terms. As a result of the CNL Restaurant
Business acquisitions, APF will become one of the industry leaders in
triple-net lease financing and mortgage loan origination. The proven
systems of the CNL Restaurant Businesses will enable APF 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 will provide 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 will be 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 will be responsible for APF's compliance with the rules and
regulations of the Securities and Exchange Commission and financial and
tax reporting.
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Financial Products and Services
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 March 31, 1999, the average remaining
initial lease term with respect to APF's 513 restaurant properties was
approximately 16 years. Leases accounting for 69.2% of annualized base rent for
restaurant properties owned as of March 31, 1999, have initial lease terms
extending until at least December 31, 2014.
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
-------------------
Year Number Amount Percent
- ---- ------ ----------- -------
<S> <C> <C> <C>
2000................................................. -- $ -- -- %
2001................................................. -- -- --
2002................................................. 2 221,000 0.4
2003................................................. 1 82,000 0.2
2004................................................. 1 69,000 0.1
2005................................................. 8 758,000 1.4
2006................................................. 7 607,000 1.2
2007................................................. -- -- --
2008................................................. 3 221,000 0.4
2009................................................. 2 60,000 0.1
2010................................................. 9 865,000 1.6
2011................................................. 23 2,567,000 4.8
2012................................................. 36 5,080,000 9.5
2013................................................. 46 4,504,000 8.5
2014................................................. 37 1,372,000 2.6
Thereafter........................................... 327 36,809,000 69.2
--- ----------- -----
Totals(2).......................................... 502 $53,215,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) Annualized rental revenue includes the straight-lining of rental income in
accordance with generally accepted accounting principles.
(2) Excludes the leases of 11 restaurant properties with aggregate original
base rental income of $1,014,000, including 9 Boston Market restaurant
properties, which have been terminated. APF is actively marketing the
restaurant properties for re-lease or sale.
As of March 31, 1999, leases in APF's restaurant property portfolio
representing approximately 34% 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
50% 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
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payable that lease year. For the quarter ended March 31, 1999, APF recognized
percentage rent of $1,869, representing less than 0.01% of total revenues.
APF's leases are triple-net leases that provide that the tenants 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 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 expects that it will be able to pay
these expenses through retained funds 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 Loans. APF provides mortgage loans to operators of national and
regional restaurant chains, or their affiliates, to enable them to acquire
restaurant properties. 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.
Build to Suit Development. Following the CNL Restaurant Business
Acquisitions, APF will provide build-to-suit construction services, including
market analysis, site selection, contract negotiation, permitting and
construction. APF will be able to provide all or a selected portion of these
services to operators of national and regional restaurant chains.
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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 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
the client.
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 grew at
an estimated inflation-adjusted rate of 2.6% during 1998, representing the
seventh consecutive year of real sales growth for the industry.
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. The
restaurant industry employs more people and has more locations than any other
retail industry in the United States. According to Nation's Restaurant News,
there were nearly 799,000 restaurants in the United States as of December 31,
1997. 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 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. The top 200 franchisees of national
restaurant chains based on sales volumes, 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
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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 have 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.
Restaurant Finance Industry
The restaurant finance industry has changed significantly in the past 20
years. In many respects this change has coincided with the maturation of the
franchising business in the restaurant industry and the increasing use of debt
securitization in the capital markets. Restaurants were viewed as high-risk
investments by lenders. As a result, financing options were limited to local
banks or loans or equity investments from friends and family. The development
of marketing, brand identification and delivery systems in major chain
restaurants has dramatically reduced the failure rate of restaurants over the
last two decades. In the early 1990's, companies began to recognize the
strengthening profile of franchisees and franchise systems. Investment vehicles
were designed to pool and securitize restaurant loans. This securitization
process has increased the capital available to franchisees, especially smaller
franchisees, and has fueled much of the consolidation in the restaurant
industry over the past three years. As a result, a number of new competitors
have entered the restaurant finance arena.
Over the past six years, the total volume of commercial mortgage backed
securities has grown to more than $290 billion and is the fastest-growing
source of capital in the real estate market. Upon acquiring the CNL Restaurant
Financial Services Group, APF will increase its origination of mortgage loans,
will securitize those loans when market conditions are suitable, and will
retain the servicing rights. APF's management believes that the economics of
the securitizations will permit APF to focus on and capitalize on financing
opportunities existing in a low interest rate environment. However, as interest
rates rise, restaurant chain operators will tend to prefer triple-net lease
financing. The ability to originate both triple-net lease and debt financing
will allow APF to provide restaurant chain operators with flexible financing
options in a changing economic environment.
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 generally are responsible for providing
adequate insurance on the restaurant properties. APF believes its restaurant
properties are covered by adequate fire, flood, liability and
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property insurance provided by reputable companies. Some of the restaurant
properties, however, are not covered by disaster-type insurance with respect to
certain 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.
After completion of the acquisition of the CNL Restaurant Businesses APF
believes that its 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, will cause APF to be a
preferred provider for all the real estate related business needs of operators
of national and regional restaurant chains. Specifically, in contrast to its
competitors, APF, assuming the completion of the above-described acquisitions,
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
APF's 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.
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
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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 currently has no employees. Following the CNL Restaurant Business
acquisitions, APF will employ approximately 135 individuals, who currently are
employed by the Advisor or the CNL Restaurant Financial Services Group. None of
APF's employees will be covered by a collective bargaining agreement. APF
believes that its relationship with its employees is good.
Legal Proceedings
On May 5, 1999, four Limited Partners in several Income Funds filed a
lawsuit against the General Partners and APF, 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, alleging that the General Partners breached their fiduciary
duties and violated the provisions of certain of the Income Fund partnership
agreements 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 June 22, 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 the General Partners
breached their fiduciary duties and that APF aided and abetted the General
Partners' breach of fiduciary duties in connection with the Income Fund
acquisition. The plaintiff is seeking unspecified damages. In addition, the
plaintiff is seeking equitable relief that would enjoin the proposed Income
Fund acquisition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE INCOME FUNDS
"Management's Discussion and Analysis of the Financial Condition and Results
of Operations" of each Income Fund is included below. References to the "Income
Fund," the "General Partners" and the "Limited Partners" are references to the
relevant Income Fund, that Income Fund's General Partners and that Income
Fund's limited partners, respectively. References to "we," "our" and "us" are
references to the relevant Income Fund's General Partners. References to the
"Acquisition" refer to the acquisition by APF of the Income Funds. Complete
financial statements for each of the Income Funds for the years ended December
31, 1996, 1997 and 1998 are attached as Exhibit F to the Proxy Statement.
Statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of each Income Fund, including,
without limitation, the Year 2000 compliance disclosure, that are not
historical facts may be forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the actual results of the Income Fund could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: changes in general economic
conditions, changes in real estate conditions, APF's ability to successfully
manage the restaurant properties it will acquire as a result of the Income Fund
acquisitions and the ability of tenants of those restaurant properties to make
payments under their respective leases.
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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 March 31, 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations, which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. For the quarters ended March 31, 1999
and 1998, the Income Fund generated cash from operations of $244,246 and
$290,063, respectively. The decrease in cash from operations for the quarter
ended March 31, 1999 is primarily a result of changes in income and expenses as
described in "Results of Operations" below.
Currently, rental income from the Income Fund's restaurant properties is
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 the Limited Partners. At March 31, 1999, the Income Fund had $229,785
invested in such short-term investments, as compared to $252,521 at December
31, 1998. As of March 31, 1999, the average interest rate earned on the rental
income deposited in demand deposit accounts at commercial banks was
approximately 2.18% annually.
Total liabilities of the Income Fund, including distributions payable,
increased to $451,309 at March 31, 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 March 31, 1999 was partially
offset by a decrease in rents paid in advance at March 31, 1999, as compared to
December 31, 1998. Liabilities at March 31, 1999, to the extent they exceed
cash and cash equivalents at March 31, 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 capital contributions or loans from
us.
Based on current and anticipated future cash from operations, the Income
Fund declared distributions to Limited Partners of $266,982 and $316,221 for
the quarters ended March 31, 1999 and 1998, respectively. This represents
distributions of $8.90 and $10.54 per unit for the quarters ended March 31,
1999 and 1998, respectively. No distributions were made to us for the quarters
ended March 31, 1999 and 1998. No amounts distributed to the Limited Partners
for the quarters ended March 31, 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.
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.
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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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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.
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
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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.
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 the balance of the funds were retained
by the Income Fund to meet the Income Fund's working capital, including
acquisition and development of restaurant properties, and other needs. 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 or not invested 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.
Currently rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
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. The
funds remaining at December 31, 1998, will be used for the payment of
distributions and other liabilities.
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
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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.
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.
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 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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund owned and leased 15
wholly owned restaurant properties, which included one restaurant property in
Kissimmee, Florida, that was sold in April 1998, to operators of fast-food and
family-style restaurant chains and during the quarter ended March 31, 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 quarters ended March 31, 1999 and 1998, the Income Fund earned
$233,666 and $273,609, respectively, in rental income from these restaurant
properties. Rental income decreased during the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, by approximately $15,200 as a
result of the sale of a restaurant property during 1998.
The decrease in rental income during the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, is also partially a result of the
fact that during the quarter ended March 31, 1999, the Income
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Fund established an allowance for doubtful accounts of approximately $11,800 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. In addition, due to the financial
difficulties the tenant is experiencing, contingent rental income relating to
the Mesquite, Texas restaurant property decreased by approximately $6,500
during the quarter ended March 31, 1999, as compared to the quarter ended
March 31, 1998.
For the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased two restaurant properties indirectly through joint venture arrangements
and one restaurant property with affiliates as tenants-in-
common. In connection therewith, during the quarters ended March 31, 1999 and
1998, the Income Fund earned $23,890 and $20,873, respectively, attributable to
net income earned by these joint ventures.
Operating expenses, including depreciation and amortization expense, were
$113,245 and $84,072 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses is primarily attributable to
the fact that the Income Fund incurred $31,116 in transaction costs related to
us retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition. 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 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 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
"Liquidity and 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 "Liquidity and Capital
Resources."
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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
"Liquidity and Capital Resources."
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 "Liquidity and 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 "Liquidity and 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.
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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 "Liquidity and 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 "Liquidity and Capital Resources," the Income
Fund recognized a gain of $233,183 during 1997, for financial reporting
purposes. In 1996, the Income Fund sold a portion of land related to the
restaurant property in Mesquite, Texas, as described above in "Liquidity and
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
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. As of March 31, 1999, the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
the restaurant properties in accordance with the terms of the Income Fund's
leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income
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Fund's transfer agent. The Income Fund depends on its tenants for rents and
cash flows, its financial institutions for availability of cash and its
transfer agent to maintain and track investor information. The Y2K Team has
also requested and is evaluating documentation from the non-information
technology systems providers of our affiliates. Although we continue 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 tenants, financial institutions, transfer agent, other vendors and
system providers have adequately considered the impact of the Year 2000. We are
not able to measure the effect on the operations of the Income Fund of any
third party's failure to adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund generated
cash from operations, which includes cash received from tenants, distributions
from joint ventures, and interest and other income received, less cash paid for
expenses, of $518,058 and $596,047, respectively. The decrease in cash from
operations for the quarter ended March 31, 1999, as compared to the quarter
ended March 31, 1998, 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 quarter
ended March 31, 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
March 31, 1999, the net sales proceeds of $677,678 plus accrued interest of
$497, 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 is
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 the partners. At March 31, 1999, the Income Fund had $899,137 invested in
such short-term investments, as compared to $889,891 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The funds remaining at March 31, 1999, after payment of
distributions and other liabilities, will be used to meet the Income Fund's
working capital, including acquisition and development of restaurant
properties, and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $751,942 at March 31, 1999 from $752,030 at December 31, 1998. We
believe the Income Fund has sufficient cash on hand to meet its current working
capital needs.
Based on current cash from operations, and for the quarter ended March 31,
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 $515,629 and $1,747,628 for
the
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quarters ended March 31, 1999 and 1998, respectively. This represents
distributions of $10.31 and $34.95 per unit for the quarters ended March 31,
1999 and 1998, respectively. Distributions for the quarter ended March 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. 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 and are
expected to remain fixed. Therefore, distributions of net cash flow were
adjusted during 1998. No distributions were made to us for the quarters ended
March 31, 1999 and 1998. No amounts distributed to the Limited Partners for the
quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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.
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.
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Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
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 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
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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 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 is
invested in money market accounts or other short-term highly liquid investments
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. 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.
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.
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
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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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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 flow in excess of
operating expenses. 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 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased 29 wholly owned restaurant properties, which included one restaurant
property in Columbia, Missouri that was sold in March 1999, to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the quarters ended March 31, 1999 and 1998, the Income Fund earned $420,201 and
$432,820, respectively, in rental income from these restaurant properties.
Rental income decreased during the quarter ended March 31, 1999, as compared to
the quarter ended March 31, 1998, primarily as a result of the Income Fund
establishing an allowance for doubtful accounts of approximately $12,300 for
past due rental amounts relating to the restaurant properties in Casper and
Rock Springs, Wyoming in accordance with the Income Fund's collection policy.
We will continue to pursue collection of past due rental amounts relating to
these restaurant properties and will recognize such amounts as income if
collected.
For the quarters ended March 31, 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 certain of
our affiliates. In connection therewith, during the quarters ended March 31,
1999 and 1998, the Income Fund earned $107,239 and $109,416, respectively,
attributable to net income earned by these joint ventures.
During the quarter ended March 31, 1999, 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 and
mortgage interest income, including the Income Fund's share of rental income
from three restaurant properties owned by joint ventures and six restaurant
properties owned with affiliate as tenants-in-common. As of March 31, 1999,
Golden Corral Corporation was the lessee under leases relating to five
restaurants and Restaurant Management Services, Inc. was the lessee under
leases relating to four restaurants. It is anticipated
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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. In addition, during the quarter ended March 31,
1999, three restaurant chains, Golden Corral, Wendy's, 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. It is
anticipated that these three 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, were $170,240
and $133,519 for the quarters ended March 31, 1999 and 1998, respectively. The
increase in operating expenses during the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, was partially due to the Income
Fund incurring $32,324 in transaction costs relating to us retaining financial
and legal advisors to assist us in evaluating and negotiating the Acquisition.
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 quarter ended March 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 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 quarter
ended March 31, 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 quarter ended March 31, 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 quarter ended March 31, 1999.
As a result of the sale of the restaurant property in Columbia, Missouri, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $192,752 for financial reporting purposes during the
quarter ended March 31, 1999. No restaurant properties were sold during the
quarter ended March 31, 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
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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 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 "Liquidity and 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 "Liquidity and 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 "Liquidity and 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.
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 "Liquidity and 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 "Liquidity and 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 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
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. As of March 31, 1999 the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
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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 the restaurant properties in accordance
with the terms of the Income Fund's leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 1999, the Income Fund owned 28 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund generated
cash from operations, which includes cash received from tenants, distributions
from joint ventures, and interest and other income received, less cash paid for
expenses, of $442,021 and $501,741, respectively. The decrease in cash from
operations for the quarter ended March 31, 1999 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 quarter
ended March 31, 1999.
In January 1999, the Income Fund reinvested the majority of the net sales
proceeds from the 1998 sale of the 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
$1,091,193, resulting in a gain of $285,350 for financial reporting purposes.
The Income Fund intends to reinvest the net sales proceeds in an additional
restaurant property.
Currently, rental income from the Income Fund's restaurant properties is
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 the Income Fund. At March 31, 1999, the Income Fund had $1,044,255 invested
in such short-term investments, as compared to $2,047,140 at December 31, 1998.
As of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The decrease in cash and cash equivalents during the quarter
ended March 31, 1999, is primarily attributable to the reinvestment of sales
proceeds in a restaurant property in Montgomery, Alabama, during the quarter
ended March 31, 1999, as described above. The Income Fund expects to use the
funds remaining at March 31, 1999 to pay distributions and other liabilities
and to invest in an additional restaurant property.
Total liabilities of the Income Fund, including distributions payable,
increased to $708,034 at March 31, 1999 from $695,755 at December 31, 1998
primarily as a result of the Income Fund accruing transaction costs relating to
the Acquisition. The increase in liabilities was partially offset by a decrease
in amounts due to related parties at March 31, 1999. We believe that the Income
Fund has sufficient cash on hand to meet its current working capital needs,
including acquisition and development of restaurant properties.
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Based on current and anticipated future cash from operations, and for the
quarter ended March 31, 1998, proceeds received from the sales of two
restaurant properties during 1998, the Income Fund declared distributions to
Limited Partners of $500,000 and $1,977,747 for the quarters ended March 31,
1999 and 1998, respectively. This represents distributions of $10.00 and $39.55
per unit for the quarters ended March 31, 1999 and 1998, respectively.
Distributions for the quarter ended March 31, 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. 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. No distributions were made to us for the quarters ended March
31, 1999 and 1998. No amounts distributed to the Limited Partners for the
quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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.
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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 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
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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.
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.
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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.
Currently rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
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. 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.
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.
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,
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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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 27
wholly owned restaurant properties, which included five restaurant properties
which were sold in 1998, and during the quarter ended March 31, 1999, the
Income Fund and its consolidated joint venture owned and leased 23 wholly owned
restaurant properties, to operators of fast-food and family-style restaurant
chains. In connection therewith, during the quarters ended March 31, 1999 and
1998, the Income Fund earned $426,846 and $454,991, respectively, in rental
income from operating leases and earned income from direct financing leases
from these restaurant properties. Rental and earned income decreased by
approximately $44,000 during the quarter ended March 31, 1999, as compared to
the quarter ended March 31, 1998, as a result of the sale of five restaurant
properties during 1998. The decrease was partially offset by an increase in
rental and earned income of approximately $17,300 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 "Liquidity and Capital
Resources." Rental and earned income are expected to remain at reduced amounts
as a result of distributing a portion of the net sales proceeds from two of the
five restaurant properties sold during 1998.
In addition, during the quarters ended March 31, 1999 and 1998, the Income
Fund earned $16,470 and $41,182, respectively, in interest and other income.
The decrease in interest and other income during the quarter ended March 31,
1999, as compared to the quarter ended March 31, 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 that the Income Fund had accepted in conjunction with the sale of a
restaurant property in a prior year.
For the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased one restaurant property indirectly through a joint venture arrangement
and three restaurant properties as tenants-in-common with our affiliates. In
addition, during the quarter ended March 31, 1999, the Income Fund owned and
leased one additional restaurant property indirectly through a joint venture
arrangement. In connection therewith, during the quarters ended March 31, 1999
and 1998, the Income Fund earned income of $41,459 and $22,751, respectively,
attributable to net income recorded by these joint ventures. The increase in
net income earned by joint ventures during the quarter ended March 31, 1999, is
primarily attributable 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 an affiliate of the Income Fund which has the same general
partners.
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Operating expenses, including depreciation and amortization expense, were
$150,789 and $132,552 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, was primarily
attributable to the fact that during the quarter ended March 31, 1999, the
Income Fund incurred $30,882 in transaction costs relating to us retaining
financial and legal advisors to assist us in evaluating and negotiating the
Acquisition. 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 of
approximately $11,000, due to the sales of several restaurant properties during
1998 and a decrease of approximately $4,200, due to the fact that, during the
quarter ended March 31, 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 of this amount by the former tenant was
doubtful. The Income Fund sold this restaurant property in June 1998.
As a result of the sales of three restaurant properties during the quarter
ended March 31, 1998, the Income Fund recognized a total gain of $583,373 for
financial reporting purposes. No restaurant properties were sold during the
quarter ended March 31, 1999.
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 "Liquidity and 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 "Liquidity and 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
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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 "Liquidity and 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.
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 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
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$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 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 "Liquidity and 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.
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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 "Liquidity
and 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.
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
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. As of March 31, 1999 the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
the restaurant properties in accordance with the terms of the Income Fund's
leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has
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also requested and is evaluating documentation from the non-information
technology systems providers of our affiliates. Although we continue 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 tenants, financial institutions, transfer agent, other vendors and
system providers have adequately considered the impact of the Year 2000. We are
not able to measure the effect on the operations of the Income Fund of any
third party's failure to adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund generated
cash from operations, which includes cash received from tenants, distributions
from joint ventures, and interest and other income received, less cash paid for
expenses of $564,831 and $586,084, respectively. The decrease in cash from
operations for the quarter ended March 31, 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 quarter
ended March 31, 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 our 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 March 31, 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, was structured to qualify as a like-kind exchange
transaction for federal income tax purposes.
Currently, 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 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 the partners. At March 31, 1999, the Income Fund had $689,011 invested in
such short-term investments, as compared to $739,382 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The funds remaining at March 31, 1999 will be used to pay
distributions and other liabilities.
Total liabilities of the Income Fund, including distributions payable,
increased to $893,694 at March 31, 1999 from $849,833 at December 31, 1998,
partially as a result of an increase in rents paid in advance at March 31,
1999. In addition the increase in liabilities at March 31, 1999 is partially a
result of the Income Fund accruing transaction costs relating to the
Acquisition. Total liabilities at March 31, 1999, to the extent they exceed
cash and cash equivalents at March 31, 1999, will be paid from future cash from
operations, and in the event we elect to make additional contributions, from
contributions from us.
Based on current and anticipated future cash from operations and, for the
quarter ended March 31, 1998, net sales proceeds from the sale of the
restaurant properties in Fort Myers, Florida and Union Township, Ohio,
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the Income Fund declared distributions to Limited Partners of $600,000 and
$1,833,748 for the quarters ended March 31, 1999 and 1998, respectively. This
represents distributions of $10.00 and $30.56 per unit for the quarters ended
March 31, 1999 and 1998, respectively. Distributions for the quarter ended
March 31, 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. The reduced number of restaurant properties for which
the Income Fund receives rental payments, as well as ongoing operations,
reduced the Income Fund revenues during 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. No distributions were made to us for the
quarters ended March 31, 1999 and 1998. No amounts distributed to the Limited
Partners for the quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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.
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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 meet other
working capital needs of the Income Fund.
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.
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
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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 for other Income Fund purposes.
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 property in Zephyrhills, Florida with an affiliate of the General
Partners as tenants-in-common for a 76 percent interest in the property. The
Income Fund will account for its investment in this 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
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 the General Partners) resulting from the sale.
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 is
invested in money market accounts or other short-term highly liquid investments
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. 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.
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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, 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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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 flow in excess of
operating expenses. 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.
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Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund owned and leased 34
wholly owned restaurant properties, which included two restaurant properties,
one in each of Union Township, Ohio and Fort Myers, Florida, which were sold in
March 1998, and during the quarter ended March 31, 1999, the Income Fund owned
and leased 30 wholly owned restaurant properties, generally to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the quarters ended March 31, 1999 and 1998, the Income Fund earned $527,659 and
$571,885, respectively, in rental income from operating leases and earned
income from the direct financing leases from these restaurant properties. The
decrease in rental and earned income for the quarter ended March 31, 1999 was
primarily due to the sale of the restaurant properties in Fort Myers, Florida
and Union Township, Ohio in March 1998, and the 1998 sale of the restaurant
property in Naples, Florida in September 1998. During the quarter ended March
31, 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.
The decrease in rental and earned income during the quarter ended March 31,
1999, was partially offset by the fact that during the quarter ended March 31,
1999, the Income Fund collected and recognized as income a portion of the past
due rental amounts owed from the former tenant of the restaurant property
located in Palm Bay, Florida, for which the Income Fund had previously
established an allowance for doubtful accounts. The former tenant vacated this
restaurant property in October 1997 and the Income Fund had been pursuing
collection of the past due rental amounts. The Income Fund received the past
due rental amounts from the former tenant's guarantor in accordance with a
settlement agreement between the Income Fund and the former tenant's guarantor
to collect some of the amounts due to the Income Fund from the former tenant of
this restaurant property. In addition, the decrease in rental and earned income
during the quarter ended March 31, 1999, was partially offset by an increase in
rental and earned income, due to the fact that, in February 1998, the Income
Fund entered into a new lease with a new tenant for this restaurant property.
During the quarters ended March 31, 1999 and 1998, the Income Fund earned
$8,243 and $21,661, respectively, in contingent rental income from the Income
Fund's wholly owned restaurant properties. The decrease in contingent rental
income during the quarter ended March 31, 1999, as compared to the quarter
ended March 31, 1998, is primarily due to a decrease in gross sales of certain
restaurant properties, the leases of which require the payment of contingent
rental income.
In October 1998, the tenant of one Boston Market restaurant property filed
for bankruptcy. As of April 30, 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 quarter ended March 31, 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 quarter ended March 31, 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 quarters ended March 31, 1999 and 1998, the Income Fund earned
$73,674 and $42,174, respectively, attributable to the net income earned by
these joint ventures. The increase in net income earned by joint ventures is
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 and the fact that in January 1999, the Income
Fund reinvested net sales proceeds from the 1998
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sale of its restaurant property in Naples, Florida in a restaurant property in
Zephyrhills, Florida, as tenants-in-common with one of our affiliates. In
addition, net income earned by joint ventures during the quarter ended March
31, 1998, was less than that earned during the quarter ended March 31, 1999,
due to the fact that Auburn Joint Venture adjusted estimated contingent rental
amounts accrued at December 31, 1997, to actual amounts during the quarter
ended March 31, 1998.
Operating expenses, including depreciation and amortization, were $206,661
and $192,420 for the quarters ended March 31, 1999 and 1998, respectively. The
increase in operating expenses for the quarter ended March 31, 1999, as
compared to March 31, 1998, was partially due to an increase in operating
expenses for the quarter ended March 31, 1999 due to the fact that the Income
Fund incurred $33,018 in transaction costs related to us retaining financial
and legal advisors to assist us in evaluating and negotiating the Acquisition.
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 ended March 31, 1999, as compared to the quarter ended March 31, 1998,
is partially offset by a decrease in depreciation expense which resulted from
the sale of four restaurant properties in 1998.
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 quarter ended March 31, 1998. No
restaurant properties were sold during the quarter ended March 31, 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 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 "Liquidity and
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
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Winchester, Indiana, in June 1997, as described above in "Liquidity and 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 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
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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 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.
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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.
Year 2000 Readiness Disclosure
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. As of March 31, 1999 the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
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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 the restaurant
properties in accordance with the terms of the Income Fund's leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 1999, the Income Fund owned 23 restaurant properties
which included interests in four 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund generated
cash from operations, which includes cash received from tenants, distributions
from joint ventures, and interest and other income received, less cash paid for
expenses. Cash from operations was $520,276 and $460,505 for the quarters ended
March 31, 1999 and 1998, respectively. The increase in cash from operations for
the quarter ended March 31, 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 quarter
ended March 31, 1999.
During the quarter ended March 31, 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 restaurant properties
for approximately $171,200 in excess of their original purchase prices. The
proceeds received from the sale of these restaurant properties will be used to
reinvest in additional restaurant properties or use for other Income Fund
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
three months ended March 31, 1999, the borrower relating to the promissory note
accepted in connection with the sale of the restaurant property in St. Cloud,
Florida, made an advance payment of $272,500 which was applied to the
outstanding principal balance relating to this promissory note. The Income Fund
intends to reinvest the $272,500 payment in an additional restaurant property.
In April 1999, the Income Fund collected the remaining outstanding balance
relating to the promissory note collateralized by the restaurant property in
St. Cloud, Florida. The Income Fund intends to reinvest the amounts collected
in additional restaurant properties or use for other Income Fund 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, 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, to make distributions to the partners and, for net sales proceeds, to
reinvest in additional restaurant properties. At March 31, 1999, the Income
Fund had $1,764,502 invested in such short-term investments, as compared to
$352,648 at December 31, 1998. As of March 31, 1999, the average interest rate
earned on the rental income deposited in demand deposit accounts at commercial
banks was approximately 2.18% annually. The increase in cash and cash
equivalents for the quarter ended March 31, 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, as described
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above. The funds remaining at March 31, 1999, will be used towards the
reinvestment of net sales proceeds in a replacement restaurant property,
payment of distributions and other liabilities.
Total liabilities of the Income Fund increased to $851,504 at March 31,
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
at March 31, 1999, as compared to December 31, 1998 and an increase in amounts
due to related parties. Liabilities at March 31, 1999, to the extent they
exceed cash and cash equivalents at March 31, 1999, excluding amounts held
representing net sales proceeds from the sale of restaurant properties and
collections from the advanced payment 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.
During the quarter ended March 31, 1999, Halls Joint Venture in which the
Income Fund owns a 48.9% interest entered into an agreement with the tenant to
sell the restaurant property owned by the joint venture. We believe that the
anticipated sale price will exceed the net carrying value of the restaurant
property. As of May 13, 1999, the sale had not occurred.
Based on current and anticipated future cash from operations, and for the
quarter ended March 31, 1998, proceeds received from the sales of restaurant
properties, the Income Fund declared distributions to the Limited Partners of
$500,000 and $2,338,327 for the quarters ended March 31, 1999 and 1998,
respectively. This represents distributions for the quarters ended March 31,
1999 and 1998 of $10.00 and $46.77 per unit, respectively. Distributions for
the quarter ended March 31, 1998, included $1,838,327 as a result of the
distribution of net sales proceeds from the sale of restaurant properties, as
described above. 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. No distributions were made to us for the quarters ended March 31,
1999 and 1998. No amounts distributed to the Limited Partners for the quarters
ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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,
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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 other Income Fund
purposes.
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 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
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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 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 the 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.
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Currently rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
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. 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.
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 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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund and its
consolidated joint venture, CNL/Longacre Joint Venture, owned and leased 22
wholly owned restaurant properties, which included two restaurant properties
which were sold during 1998, and during the quarter ended March 31, 1999, the
Income Fund and CNL/Longacre Joint Venture owned and leased 20 wholly owned
restaurant properties, which included two restaurant properties which were sold
in March 1999, to operators of fast-food and family-style restaurant chains. In
connection therewith, during the quarters ended March 31, 1999 and 1998, the
Income Fund and CNL/Longacre Joint Venture earned $330,844 and $359,863,
respectively, in rental income from operating leases and earned income from
direct financing leases. Rental and earned income decreased by approximately
$20,000 during the quarter ended March 31, 1999, as compared to the quarter
ended March 31, 1998, as a result of the sales of the restaurant properties in
Port Orange, Florida and Tyler, Texas during 1998.
Rental and earned income also decreased during the quarter ended March 31,
1999 as compared to the quarter ended March 31, 1998, by approximately $13,000
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 are reinvested in an additional
restaurant property.
The decrease in rental and earned income was partially offset by an increase
of approximately $9,000 during the quarter ended March 31, 1999 resulting from
the Income Fund entering into a new lease for the restaurant property in South
Haven, Michigan as of March 31, 1998.
Rental and earned income during the quarters ended March 31, 1999 and 1998,
continued to remain at reduced amounts due to the fact that the Income Fund is
not receiving any 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
executed new leases or until the restaurant properties are sold and the
proceeds from such sales are reinvested in additional restaurant properties.
For the quarters ended March 31, 1999 and 1998, the Income Fund also earned
$8,087 and $25,898, respectively, in contingent rental income. The decrease in
contingent rental income during the quarter ended March 31, 1999, as compared
to the quarter ended March 31, 1998, is partially attributable to a decrease in
gross sales of certain restaurant properties, the leases of which require the
payment of contingent rental income. The decrease in contingent rental income
is also attributable to the sale of a restaurant property, the lease of which
required the payment of contingent rental income.
For the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased two restaurant properties indirectly through joint venture arrangements
and two restaurant properties as tenants-in-common
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with our affiliates. In addition, during the quarter ended March 31, 1999, the
Income Fund owned and leased an additional restaurant property indirectly
through a joint venture arrangement. In connection therewith, the Income Fund
earned $56,838 and $35,221, 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 these joint ventures during the quarter ended
March 31, 1999, as compared March 31, 1998, is primarily 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 quarters ended March 31, 1999 and 1998, the Income Fund also
earned $58,654 and $92,358, respectively, in interest and other income.
Interest and other income was higher during the quarter ended March 31, 1998,
partially due to the fact that during the quarter ended March 31, 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.
The decrease was also 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
tenant made an advance payment of principal in the amount of $272,500 during
the quarter ended March 31, 1999, as described above in "Liquidity and Capital
Resources."
During the quarter ended March 31, 1999, Slaymaker Group, Inc. and Golden
Corral Corporation, two lessees of the Income Fund and its consolidated joint
venture, each contributed 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. As of March 31, 1999, Slaymaker Group, Inc.
was the lessee under a lease relating to one restaurant and Golden Corral
Corporation was the lessee under the leases relating to two restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
these lessees will continue to contribute more than ten percent of the Income
Fund's total rental income during the remainder of 1999. In addition, during
the quarter ended March 31, 1999, two restaurant chains, Golden Corral and Tony
Roma's, 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 each of these
restaurant chains 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 expense, were $150,850 and
$124,189 for the quarters ended March 31, 1999 and 1998, respectively. The
increase in operating expenses during the quarter ended March 31, 1999 as
compared to the quarter ended March 31, 1998, was primarily attributable to the
fact that the Income Fund incurred $31,470 in transaction costs relating to us
retaining financial and legal advisors to assist in evaluating and negotiating
the Acquisition.
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, incurred and expects to continue to incur operating expenses
relating to such 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 $181,610 and $791 during
the quarters ended March 31, 1999 and 1998, respectively. The increase in the
gain recognized is due to the fact that during the quarter ended March 31,
1999, the Income Fund collected advance payments of principal relating to the
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promissory note collateralized by a restaurant property in St. Cloud, Florida,
as described above in "Liquidity and Capital Resources," which accelerated the
recognition of the gain for financial reporting purposes.
As a result of the sales of the restaurant properties in Endicott and
Ithaca, New York, and the sales of the restaurant properties in Port Orange,
Florida and Tyler, Texas, the Income Fund recognized total gains of $213,503
and $440,822, respectively, for financial reporting purposes during the
quarters ended March 31, 1999 and 1998, respectively.
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 which 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 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 "Liquidity and 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 "Liquidity and 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
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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 "Liquidity and 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 "Liquidity and 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 "Liquidity and 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 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 "Liquidity and 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 "Liquidity and 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
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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 "Liquidity and
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 "Liquidity and 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 "Liquidity and 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 "Liquidity and Capital Resources."
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 "Liquidity and 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 "Liquidity and Capital Resources."
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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
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. As of March 3, 1999 the Income Fund did not
have any information or non-information technology systems. We and certain of
our affiliates of the general partners 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 the restaurant
properties in accordance with the terms of the Income Fund's leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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
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provided by the vendors have addressed all possible Year 2000 issues. We do not
expect the aggregate cost of the Year 2000 remedial measures to be material to
the results of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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>
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<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 March 31, 1999, the Income Fund owned 42
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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations, which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $960,251 and
$861,169 for the quarters ended March 31, 1999 and 1998, respectively. The
increase in cash from operations for the quarter ended March 31, 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 quarter
ended March 31, 1999.
In April 1998, the Income Fund entered into a joint venture arrangement,
Melbourne Joint Venture, with CNL Income Fund XIV, Ltd., one of our affiliates,
to construct and hold one restaurant property. During the quarter ended March
31, 1999, the Income Fund made additional capital contributions of
approximately $114,900 to this joint venture to pay construction costs of the
joint venture restaurant property accrued at December 31, 1998. As of March 31,
1999 the Income Fund owned a 50 percent interest in the profits and losses of
the joint venture.
Currently, rental income from the Income Fund's restaurant properties is
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 the partners. At March 31, 1999, the Income Fund had $1,158,507 invested in
such short-term investments as compared to $1,170,686 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The funds remaining at March 31, 1999, after payment of
distributions and other liabilities, will be used to meet the Income Fund's
working capital, including acquisition and development of restaurant
properties, and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $888,407 at March 31, 1999, from $915,817 at December 31, 1998,
primarily as the result of the Income Fund accruing a special distribution of
accumulated, excess operating reserves to the Limited Partners of $70,000 at
December 31, 1998, which was paid in January 1999. The decrease in liabilities
at March 31, 1999 is partially offset due to the Income Fund accruing
transaction costs relating to the Acquisition. We believe the Income Fund has
sufficient cash on hand to meet the Income Fund's current working capital
needs.
During the quarter ended March 31, 1999, one of the Income Fund's tenants
decided to exercise the option under it four lease agreements to purchase four
of the Income Fund's Burger King restaurant properties. We believe that the
anticipated sales price for each restaurant property exceeds the Income Fund's
net carrying value attributable to each of the respective restaurant
properties. As of May 13, 1999, the sales had not occurred.
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<PAGE>
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $787,500 for each of the quarters ended March 31, 1999 and
1998. This represents distributions for each
applicable quarter of $11.25 per unit. No distributions were made to us for the
quarters ended March 31, 1999 and 1998. No amounts distributed to the Limited
Partners for the quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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
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<PAGE>
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 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.
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<PAGE>
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 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
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<PAGE>
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 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.
Currently rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
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. 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.
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
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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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund and its
consolidated joint venture, Caro Joint Venture, owned and leased 35 wholly
owned restaurant properties, which included three restaurant properties that
were sold during 1998, to operators of fast-food and family-style restaurant
chains. During the quarter ended March 31, 1999, the Income Fund and Caro Joint
Venture, owned and leased 32 wholly owned restaurant properties. In connection
therewith, the Income Fund and Caro Joint Venture earned $712,817 and $756,260
during the quarters ended March 31, 1999 and 1998, respectively, in rental
income from operating leases and earned income from direct financing leases
from these restaurant properties. Rental and earned income decreased during the
quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998,
primarily as a result of the sales during 1998 of the restaurant properties in
Deland and Melbourne, Florida and Bellevue, Nebraska. 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 these net sales proceeds in joint ventures or in restaurant
properties with our affiliates, as tenants-in-common.
The decrease in rental and earned income during the quarter ended March 31,
1999 is also attributable to the fact that Caro Joint Venture established an
allowance for doubtful accounts for past due rental amounts during the quarter
ended March 31, 1999. Caro Joint Venture will continue to pursue collection of
these past due rental amounts and any amounts collected will be recorded as
income. In addition, rental and earned
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income were higher during the quarter ended March 31, 1998, due to the fact
that Caro Joint Venture collected and recognized as income past due rental
amounts for which it had previously established an allowance for doubtful
accounts.
For the quarters ended March 31, 1999 and 1998, the Income Fund also earned
$9,175 and $32,390, respectively, in contingent rental income. The decrease in
contingent rental income during the quarter ended March 31, 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.
For the quarter ended March 31, 1998, the Income Fund owned and leased three
restaurant properties indirectly through joint venture arrangements and four
restaurant properties as tenants-in-common with our affiliates. For the quarter
ended March 31, 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 quarters ended March 31, 1999 and 1998, the Income Fund earned
$123,775 and $56,496, respectively, attributable to net income earned by these
joint ventures. The increase in net income earned by joint ventures during the
quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998,
is primarily due to the fact that in 1998, the Income Fund reinvested the net
sales proceeds it received from the 1998 sales of three restaurant properties
in Melbourne Joint Venture and Warren Joint Venture and in a restaurant
property in Fort Myers, Florida, with one of our affiliates as tenants-in-
common.
During the quarters ended March 31, 1999 and 1998, the Income Fund earned
$15,456 and $36,676, respectively, in interest and other income. Interest and
other income was higher during the quarter ended March 31, 1998, partially due
to the fact that during the quarter ended March 31, 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
restaurant properties. The Income Fund reinvested the net sales proceeds
subsequent to March 31, 1998. Interest and other income was also higher during
the quarter ended March 31, 1998, due to the fact that Caro Joint Venture
recognized approximately $13,300 in other income during the quarter ended March
31, 1998, due to the fact that the tenant of the restaurant property in Caro,
Michigan, paid past due real estate taxes relating to the restaurant property
and the joint venture reversed such amounts during 1998 that it had previously
accrued as payable during 1997.
Operating expenses, including depreciation and amortization expense, were
$202,337 and $177,150 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses for the quarter ended March
31, 1999, is primarily due to the fact that the Income Fund incurred $33,125 in
transaction costs during the quarter ended March 31, 1999 related to us
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition. 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 Deland, Florida, the
Income Fund recognized a gain of $345,122 during the quarter ended March 31,
1998, for financial reporting purposes. No restaurant properties were sold
during the quarter ended March 31, 1999.
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
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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. 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 "Liquidity and 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
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estate taxes described above in "Liquidity and 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 "Liquidity and 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 "Liquidity and 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 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 "Liquidity and 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 "Liquidity and 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 "Liquidity and
Capital Resources."
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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.
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 "Liquidity and 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.
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As a result of the sale of the restaurant property in Deland, Florida, as
described above in "Liquidity and 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 "Liquidity and 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 "Liquidity and 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
"Liquidity and 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 "Liquidity and Capital Resources." No such provision was
recorded during the year ended December 31, 1998 and 1996.
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
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. As of March 31, 1999 the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
the restaurant properties in accordance with the terms of the Income Fund's
leases.
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In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 1999, the Income Fund owned 40 restaurant
properties, which included interests in ten 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations, which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $738,569 and
$749,233 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, 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.
Currently, rental income from the Income Fund's restaurant properties is
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 the partners. At March 31, 1999, the Income Fund had $918,362 invested in
such short-term investments, as compared to $856,825 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The funds remaining at March 31, 1999, after payment of
distributions and other liabilities, will be used to meet the Income Fund's
working capital, including acquisition and development of restaurant
properties, and other needs.
Total liabilities of the Income Fund, including payable, increased to
$783,852 at March 31, 1999, from $757,857 at December 31, 1998. The increase in
liabilities at March 31, 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 quarter ended March 31, 1999, one of the Income Fund's tenants
decided to exercise the option under its three lease agreements to purchase
three of the Income Fund's Burger King restaurant properties, including one
restaurant property owned by a joint venture in which the Income Fund owns a
51.1% interest. We believe that the anticipated sales price for each restaurant
property exceeds the Income Fund's net carrying value attributable to each of
the respective restaurant properties. As of May 13, 1999, the sales had not
occurred.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $675,000 for each of the quarters ended March 31, 1999 and
1998. This represents distributions for each applicable quarter of $0.023 per
unit. No distributions were made to us for the quarters ended March 31, 1999
and 1998. No amounts distributed to the Limited Partners for the quarters ended
March 31, 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
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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.
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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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
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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.
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.
Currently rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
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. The funds remaining at December 31, 1998, will be used for
the payment of distributions and other liabilities.
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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. We believe that the
Income Fund has sufficient cash on hand to meet its current working capital
needs.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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.
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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and March 31, 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. In connection therewith, during the quarters
ended March 31, 1999 and 1998, the Income Fund and its consolidated joint
venture, earned $594,600 and $597,099, respectively, in rental income from
operating leases and earned income from direct financing leases.
During the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased nine restaurant properties indirectly through other joint venture
arrangements and owned two restaurant properties, indirectly with our
affiliates as tenants-in-common. In connection therewith, during the quarters
ended March 31, 1999 and 1998, the Income Fund earned $73,295 and $77,933,
respectively, attributable to net income earned by these unconsolidated joint
ventures.
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Operating expenses, including depreciation expense, were $162,172 and
$117,170 for the quarters ended March 31, 1999 and 1998, respectively. The
increase in operating expenses during the quarter ended March 31, 1999, is
partially due to the fact that during the quarter ended March 31, 1999, the
Income Fund incurred $33,273 in transaction costs related to us retaining
financial and legal advisors to assist us in evaluating the negotiating the
Acquisition. 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 ended
March 31, 1999, as compared to the quarter ended March 31, 1998, is partially
attributable to the Income Fund incurring additional state taxes due to changes
in tax laws of a state in which the Income Fund conducts business.
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 $273 and
$247 for the quarters ended March 31, 1999 and 1998, respectively.
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
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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.
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 "Liquidity and 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 "Liquidity and 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
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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.
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 "Liquidity and
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 "Liquidity and 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 "Liquidity and 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 "Liquidity and 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 "Liquidity and 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
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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.
Year 2000 Readiness Disclosure
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. As of March 31, 1999 the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
the restaurant properties in accordance with the terms of the Income Fund's
leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants,
financial institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
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We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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>
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<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 March
31, 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations, which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $924,814 and
$989,892 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 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 capital.
Other sources and uses of capital included the following during the quarter
ended March 31, 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
three months ended March 31, 1999, the borrower relating to the promissory note
accepted in connection with the sale of the restaurant property in Orlando,
Florida made an advance payment of $272,500 which applied to the outstanding
principal balance relating to this promissory note. The Income Fund intends to
reinvest the $272,500 payment in an additional property.
Currently, rental income from the Income Fund's restaurant properties is
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 the partners. At March 31, 1999, the Income Fund had $1,876,769 invested in
such short-term investments, as compared to $1,809,258 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The funds remaining at March 31, 1999, after payment of
distributions for the quarter ended March 31, 1999, and other liabilities, will
be used to meet the Income Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $1.009,796 at March 31, 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 increase in liabilities
at March 31, 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, including
acquisition and development of restaurant properties.
Based on cash from operations and, for the quarter ended March 31, 1998,
accumulated excess operating reserves, the Income Fund declared distributions
to Limited Partners of $787,501 and $1,137,500 for the quarters ended March 31,
1999 and 1998, respectively. This represents distributions of $0.023 and $0.033
per unit, respectively. No distributions were made to us for the quarters ended
March 31, 1999 and 1998. No
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<PAGE>
amounts distributed to the Limited Partners for the quarters ended March 31,
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.
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 flows 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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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 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. The Income Fund has an approximately 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
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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.
Currently rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
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 has
$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.
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.
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.
Based on cash from operation, 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
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<PAGE>
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund and is
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 quarters ended March 31,
1999 and 1998, the Income Fund and Woodway Joint Venture earned $729,848 and
$754,998, respectively, in rental income from operating leases and earned
income from direct financing leases. Rental and earned income decreased during
the quarter ended March 31, 1999, due to the fact that the leases relating to
the Burger King restaurant properties in New 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 term.
For the quarters ended March 31, 1999 and 1998, the Income fund also earned
$3,279 and $18,486, respectively, in contingent rental income. The decrease in
contingent rental income during the quarter ended March 31, 1999, as compared
to the quarter ended March 31, 1998, is primarily attributable to the fact that
during the quarter ended March 31, 1998, the Income Fund recorded additional
contingent rental amounts as a result of adjusting estimated contingent rental
amounts at December 31, 1997, to actual amounts. Contingent rental income also
decreased due to decreased gross sales of certain restaurant properties, the
leases of which require the payment of contingent rent.
During the quarters ended March 31, 1999 and 1998, the Income Fund also
earned $54,365 and $65,084, respectively, in interest and other income. The
decrease in interest and other income during the quarter ending March 31, 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 tenant made an advance payment of
principal in the amount of $272,500 during the quarter ended March 31, 1999, as
described above in "Liquidity and Capital Resources."
For the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased eight restaurant properties indirectly through joint ventures
arrangements. In connection therewith, during the quarters ended March 31, 1999
and 1998, the Income Fund earned $60,231 and $68,104, respectively,
attributable to net income earned by these unconsolidated joint ventures. The
decrease in net income earned by joint ventures for
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<PAGE>
the quarter ended March 31, 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
$169,525 and $95,460 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 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 the restaurant properties in New City
and Syracuse, New York and New Philadelphia and Mansfield, Ohio from direct
financing leases to operating leases, as a result of lease amendments. In
addition, the increase is partially 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 increase in operating expenses for the quarter ended March 31, 1999, is
also partially due to the fact that the Income Fund incurred $33,563 in
transaction costs related to us retaining financial and legal advisors to
assist us in evaluating and negotiating the Acquisition. 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 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.
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 "Liquidity and 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.
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<PAGE>
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 "Liquidity and 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 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 "Liquidity and 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 "Liquidity and 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.
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<PAGE>
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
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. As of March 31, 1999, the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
the restaurant properties in accordance with the terms of the Income Fund's
leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 used in the business
activities and operations of the Income
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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. We do not expect the aggregate cost of the Year 2000 remedial
measures to be material to the results of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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>
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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 March 31, 1999, the Income Fund owned 40 restaurant
properties, which included interests in thirteen 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund generated cash from operations, which includes cash received
from tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses, during the quarters ended March 31, 1999
and 1998, of $785,344 and $804,054, respectively. The decrease in cash from
operations for the quarter ended March 31, 1999, as compared to the quarter
ended March 31, 1998, 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 March 31, 1999.
During February and March 1999, the Income Fund sold its restaurant
properties in Corpus Christi, Texas and Rochester, New York respectively, and
received total sales proceeds of $2,400,000 resulting in a total gain of
$75,997 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 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 the partners and, for net sales proceeds,
to reinvest in additional restaurant properties. At March 31, 1999, the Income
Fund had $2,044,011 invested in such short-term investments, as compared to
$1,287,379 at December 31, 1998. As of March 31, 1999, the average interest
rate earned on the rental income deposited in demand deposit accounts at
commercial banks was approximately 2.18% annually. The increase in cash and
cash equivalents for the quarter ended March 31, 1999, is 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 March 31, 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.
Total liabilities of the Income Fund, including distributions payable,
increased to $965,376 at March 31, 1999, from $885,160 at December 31, 1998,
partially as a result of an increase in escrowed real estate taxes
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payable and an increase in rents paid in advance at March 31, 1999. In
addition, the increase in liabilities at March 31, 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.
Based on current and anticipated future cash from operations, and for the
quarter ended March 31, 1998, accumulated excess operating reserves, the Income
Fund declared distributions to the Limited Partners of $787,501 and $857,501
for the quarters ended March 31, 1999 and 1998, respectively. This represents
distribution for the quarters ended March 31, 1999 and 1998 of $0.23 and $0.25
per unit, respectively. No distributions were made to us for the quarters ended
March 31, 1999 and 1998. No amounts distributed to the Limited Partners for the
quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the Income Funds filed a
lawsuit against us and APF in connection with the Acquisition. We and APF
believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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
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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 is
invested in money market accounts or other short-term highly liquid investments
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
$1,287,379 invested in such short-term investments as compared to $1,250,388 at
December 31, 1997.
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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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. 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
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<PAGE>
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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund owned and leased 27
wholly owned restaurant properties, and during the quarter ended March 31,
1999, the Income Fund owned and leased 28 wholly owned restaurant properties,
which included two restaurant properties which were sold during 1999, to
operators of fast-food and family-style restaurant chains. In connection
therewith, during the quarters ended March 31, 1999 and 1998, the Income Fund
earned $591,983 and $686,894, respectively, in rental income from operating
leases, earned income from direct financing leases and contingent rental income
from these restaurant properties. The decrease in rental, earned, and
contingent rental income during the quarter ended March 31, 1999, as compared
to the quarter ended March 31, 1998, is partially due to a decrease in rental
and earned income of approximately $44,100, as a result of the sale of two
restaurant properties, as described above in "Liquidity and Capital Resources."
The decrease was partially offset approximately $5,000 due to the fact that the
Income Fund reinvested a portion of the net sales proceeds in a restaurant
property in Albany, Georgia, during the quarter ended March 31, 1999.
The decrease in rental, earned, and contingent rental income is also
partially attributable to a decrease of approximately $32,000 due to the fact
that during 1998, Brambury Associates, the tenant of the restaurant property in
Williamsville, New York filed for bankruptcy, rejected the lease and ceased
making rental payments to the Income Fund. The Income Fund will not recognize
rental, earned, or contingent rental income 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 rejected lease 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.
Rental, earned and contingent rental income also decreased by approximately
$15,600 during the quarter ended March 31, 1999, as compared to the quarter
ended March 31, 1998, due to the fact that during the quarter ended March 31,
1998, the Income Fund recorded additional contingent rental amounts as a result
of adjusting estimated contingent rental amounts accrued at December 1997, to
actual amounts.
For the quarters ended March 31, 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 quarters ended March 31,
1999 and 1998, the Income Fund earned $135,902 and $127,808, respectively,
attributable to net income earned by these joint ventures.
Operating expenses, including depreciation and amortization expense, were
$194,671 and $117,104 for the quarters ended March 31, 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 leases from direct financing leases to operating
leases during 1998.
Operating expenses also increased during the quarter ended March 31, 1999,
due to an increase in legal fees, insurance and real estate tax expense
incurred in connection with the fact that the tenant of the restaurant property
in Williamsville, New York filed for bankruptcy and ceased making rental
payments. The Income Fund will continue to incur certain expenses such as real
estate taxes, insurance and maintenance relating to
this restaurant property until a replacement tenant or purchaser is located.
The Income Fund is currently seeking either a replacement tenant or purchaser
for this restaurant property.
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<PAGE>
The increase in operating expenses for the quarter ended March 31, 1999, as
compared to March 31, 1998, is also due to the fact that the Income Fund
incurred $35,275 in transaction costs related to us retaining financial and
legal advisors to assist us in evaluating and negotiating the Acquisition. If
the Limited Partners reject the Acquisition, the Income Fund will bear that
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 "Liquidity and Capital
Resources," the Income Fund recognized a total gain of $75,997 for financial
reporting purposes during the quarter ended March 31, 1999. No restaurant
properties were sold during the quarter ended March 31, 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 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, 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.
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<PAGE>
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 "Liquidity and 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 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 is 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.
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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.
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 "Liquidity and 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
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. As of March 31, 1999 the Income Fund did
not have any information or non-information technology systems. We and certain
of our affiliates of the general partners 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
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providers. The maintenance of non-information technology systems at the Income
Fund's restaurant properties is the responsibility of the tenants of the
restaurant properties in accordance with the terms of the Income Fund's leases.
In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and property management. The Y2K Team's initial step in assessing
the Income Fund's Year 2000 readiness consists of identifying any systems that
are date-sensitive and, accordingly, could have potential Year 2000 problems.
The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by the Y2K Team, we cannot be assured that the transfer
agent has addressed all possible Year 2000 issues. 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 Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 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 affiliates as tenants-in-common.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998 was cash from operations, which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $841,122 and
$1,003,374 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 1999, is
primarily a result of changes in income and expenses as described below in
"Results of Operations" and changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the quarter
ended March 31, 1999.
In January 1999, the Income Fund used a portion of the net proceeds from the
sales of restaurant properties during 1998 and 1997 to enter into a joint
venture arrangement, Ocean Shores Joint Venture, with CNL Income Fund XVII,
Ltd., an affiliate of ours, to hold one restaurant property. The Income Fund
contributed approximately $802,400 to the joint venture and as of March 31,
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 carrying value relating to this
restaurant property of $93,329 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 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 a 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 is
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 the partners. At March 31, 1999, the Income Fund had $1,225,257 invested in
such short-term investments, as compared to $1,835,972 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The decrease in cash and cash equilvalents 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 an affiliate of ours. The funds
remaining at March 31, 1999, after payment of distributions and other
liabilities, will be used meet the Income Fund's working capital, including
acquisition and development of restaurant properties, and other needs.
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Total liabilities of the Income Fund, including distributions payable,
increased to $1,117,655 at March 31, 1999, from $1,063,223 at December 31,
1998, partially due to an increase in rents paid in advance at March 31, 1999,
as compared to December 31, 1998. In addition, the increase in liabilities at
March 31, 1999 is partially a result of the Income Fund accruing transaction
costs relating to the proposed Acquisition. We believe that the Income Fund has
sufficient cash on hand to meet its current working capital needs.
Based on current and anticipated future cash from operations, and, for the
quarter ended March 31, 1998, accumulated excess operating reserves, the Income
Fund declared distributions to Limited Partners of $900,001 and $980,001 for
the quarters ended March 31, 1999 and 1998, respectively. This represents
distributions of $0.23 and $0.25 per unit for the quarters ended March 31, 1999
and 1998, respectively. No distributions were made to us for the quarters ended
March 31, 1999 and 1998. No amounts distributed to the Limited Partners for the
quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the CNL Income Funds
filed a lawsuit against us and APF in connection with the proposed Acquisition.
We and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. In addition, on June 22, 1999, one Limited
Partner in several Income Funds filed a class action lawsuit against us, APF,
CNL Group, Inc. and the CNL Restaurant Businesses in connection with the
Acquisition. We and APF believe that the lawsuit is without merit and intend to
defend vigorously against the claims. Because the lawsuits were so recently
filed, it is premature to further comment on the lawsuits at this time.
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
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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 for
other Income Fund purposes.
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.
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.
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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 is invested in
money market accounts or other short-term highly liquid investments 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.
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 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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund and its
consolidated joint venture, Allegan Real Estate Joint Venture, owned and leased
39 wholly owned restaurant properties, which included one restaurant property
in Sacramento, California, which was sold in January 1998, to operators of
fast-food and
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family-style restaurant chains. During the quarter ended March 31, 1999, the
Income Fund and Allegan Real Estate Joint Venture owned and leased 39 wholly
owned restaurant properties (which included one restaurant property in Amherst,
New York which was sold in March 1999). In connection therewith, during the
quarters ended March 31, 1999 and 1998, the Income Fund and Allegan Real Estate
Joint Venture earned $725,315 and $806,110, respectively, in rental income from
operating leases and earned income from direct financing leases from these
restaurant properties. Rental and earned income decreased by approximately
$23,600 due to the fact that Brambury Associates, the tenant of the restaurant
properties in Lancaster and Amherst, New York, filed for bankruptcy. In
connection therewith, they rejected the lease relating to the Lancaster, New
York restaurant property and ceased making rental payments on such lease. 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 at reinvested in an additional restaurant property. We are
currently seeking either a new tenant or purchaser for this restaurant
property. Rental and earned income also decreased by approximately $27,600
during the quarter ended March 31, 1999 due to the fact that the Income Fund
sold the restaurant property located in Amherst, New York, as described above
in "Liquidity and Capital Resources," and in conjunction therewith, established
an allowance for doubtful accounts for rental amounts past due at the time of
the sale. The Income Fund will continue to pursue collection of the past due
rental amounts and any amounts collected will be recorded as income.
In addition, rental and earned income decreased by approximately $36,800 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
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.
Rental and earned income also decreased by $22,400 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. In
addition, rental and earned income decreased by approximately $16,300, as a
result of the sale of the restaurant properties in Sacramento, California in
January 1998 and Billings, Montana in October 1998. The decrease in rental and
earned income was partially offset by an increase in rental and earned income
of approximately $8,700 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 decrease in rental and earned income during the quarter ended March 31,
1999, as compared to the quarter ended March 31, 1998, was also partially
offset by an increase in rental and earned income of approximately $43,400
relating 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. In January 1999, the rents reverted back to the
amounts due under the original agreement.
During the quarters ended March 31, 1999 and 1998, the Income Fund earned
$13,714 and $26,472, respectively, in interest and other income. The decrease
in interest and other income during the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1999, was primarily attributable to the
fact that during the quarter ended March 31, 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.
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For the quarter ended March 31, 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 certain of
our affiliates. For the quarter ended March 31, 1999, the Income Fund also
owned and leased one additional restaurant property indirectly through a joint
venture arrangement. In connection therewith, during the quarters ended March
31, 1999 and 1998, the Income Fund earned $81,404 and $63,134, respectively,
attributable to the net income earned by these unconsolidated joint ventures.
The increase in net income earned by unconsolidated joint ventures during the
quarter ended March 31, 1999, was primarily attributable to the Income Fund
investing in a joint venture arrangement, Ocean Shores Joint Venture, in
January 1999, with CNL Income Fund XVII, Ltd., one of our affiliates.
Operating expenses, including depreciation expense, were $192,663 and
$113,938 for the quarters ended March 31, 1999 and 1998, respectively. The
increase in operating expense during the quarter ended March 31, 1999 and 1998,
respectively. The increase in operating expense during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 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 the restaurant
properties in Irondequoit, New York, Ashland, Ohio, and Henderson, North
Carolina 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 and real estate tax expense 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
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.
In addition, the increase in operating expenses for the quarter ended March
31, 1999 is partially due to the fact that the Income Fund incurred $33,661 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 sale of the restaurant property in Amherst, New York, as
described above in "Liquidity and Capital Resources," the Income Fund recorded
a gain of $74,640 for financial reporting purposes during the quarter ended
March 31, 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 quarter ended March 31, 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
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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 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 (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
"Liquidity and 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 (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
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approximately $13,200 of accrued rental income (non-cash accounting adjustments
relating to the straight-lining of future scheduled rent increases over the
lease term in accordance with generally accepted accounting principles).
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.
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
"Liquidity and 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.
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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.
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 "Liquidity and 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 "Liquidity and 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
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. As of March 31, 1999 the Income Fund did
not have any information or non-information technology systems. We and certain
of 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 the restaurant
properties in accordance with the terms of the Income Fund's leases.
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In early 1998, we and certain of our affiliates formed a Year 2000 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 other
members from certain of our affiliates, including representatives from senior
management, information systems, telecommunications, legal, office management,
accounting and restaurant property management. The Y2K Team's initial step in
assessing the Income Fund's Year 2000 readiness consists of identifying any
systems that are date-sensitive and, accordingly, could have potential Year
2000 problems. The Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress that we and our affiliates have made in addressing
the Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. we and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 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 an affiliate as tenants-in-common.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998 was cash from operations, which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $974,168 and
$1,024,997 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 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 quarter
ended March 31, 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 $1,034,000. 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, at a
total cost of approximately $584,100. The Income Fund contributed approximately
$247,300 and had a 42.8% interest in the profits and losses of the joint
venture as of March 31, 1999. The Income Fund intends to invest the remaining
net sales proceeds in a replacement restaurant property.
Currently, rental income from the Income Fund's restaurant properties is
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 the partners. At March 31, 1999, the Income Fund had $1,872,630 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 quarter ended March 31,
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. The funds remaining at March 31, 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. To the extent that any of the sales proceeds remain
undistributed or not invested 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.
Total liabilities of the Income Fund, including distributions payable,
decreased to $1,036,563 at March 31, 1999 from $1,142,120 at December 31, 1998
primarily as a result of the Income Fund accruing a special distribution
payable to the Limited Partners of $120,000, representing cumulative excess
operating reserves, at December 31, 1998, which was paid in January 1999. We
believe that the Income Fund has sufficient cash on hand to meet its current
working capital needs.
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Based on cash from operations, and for the quarter ended March 31, 1998,
accumulated excess operating reserves, the Income Fund declared distributions
to Limited Partners of $875,006 and $915,006 for the quarters ended March 31,
1999 and 1998, respectively. This represents distributions of $0.22 and $0.23
per unit, respectively. No distributions were made to us for the quarters ended
March 31, 1999 and 1998. No amounts distributed to the Limited Partners for the
quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the CNL Income Funds
filed a lawsuit against us and APF in connection with the proposed Acquisition.
We and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. In addition, on June 22, 1999, one Limited
Partner in several Income Funds filed a class action lawsuit against us, APF,
CNL Group, Inc. and the CNL Restaurant Businesses in connection with the
Acquisition. We and APF believe that the lawsuit is without merit and intend to
defend vigorously against the claims. Because the lawsuits were so recently
filed, it is premature to further comment on the lawsuits at this time.
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.
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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 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.
Current rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
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. 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.
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.
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,
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$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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and restaurant
property coverage for the Income Fund. This insurance is intended to reduce the
Income Fund's exposure in the unlikely event a tenant's insurance policy lapses
or is insufficient to cover a claim relating to the restaurant property.
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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 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 (which included
one restaurant property in Nashua, New Hampshire, which was sold in October
1998) to operators of national and regional restaurant chains. In connection
therewith, during the quarters ended March 31, 1999 and 1998, the Income Fund,
Denver Joint Venture and CNL/Airport Joint Venture earned $879,029 and
$882,551, respectively, in rental income from operating leases and earned
income from direct financing leases. In addition, during the quarters ended
March 31, 1999 and 1998, the Income Fund earned $20,242 and $19,768,
respectively, in contingent rental income.
In addition, during the quarter ended March 31, 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, and during the quarter ended March 31, 1999 the Income Fund
owned and leased three restaurant properties indirectly through other joint
venture arrangements and owned and leased one restaurant property with and
affiliate as tenants-in-common. In connection therewith, during the quarters
ended March 31, 1999 and 1998, the Income Fund earned $58,001 and $40,001,
respectively, attributable to net income earned by unconsolidated joint
ventures. Net income earned by joint ventures during the quarter ended March
31, 1998 was less than that earned during the quarter ended March 31, 1999,
primarily due to the fact that Ashland Joint Venture adjusted estimated
contingent rental amounts accrued at December 31, 1997 to actual amounts during
the quarter ended March 31, 1998.
Operating expenses, including depreciation and amortization expense, were
$232,476 and $181,751 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during 1999, as compared to
1998, is primarily a result of the Income Fund incurring $34,967 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 "Liquidity and Capital Resources." 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.
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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 the sale of the restaurant property in
Philadelphia, Pennsylvania in November 1996, as described above in "Liquidity
and 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 "Liquidity and 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 "Liquidity and 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
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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 "Liquidity and 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
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 "Liquidity and 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 "Liquidity and 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 "Liquidity and
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.
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Year 2000 Readiness Disclosure
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. As of March 31, 1999, the Income Fund did
not have any information or non-information technology systems. We and certain
of 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 the restaurant
properties in accordance with the terms of the Income Fund's leases.
In early 1998, we and our affiliates formed a Year 2000 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. The Y2K Team's initial step in assessing the Income Fund's Year
2000 readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 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. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be assured that the transfer agent has addressed all possible
Year 2000 issues. 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
Income Fund.
Based upon the progress that we and our affiliates have made in addressing
the Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations (which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $853,445 and
$1,129,927, for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, 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 March 31, 1999.
In August 1998, the Income Fund entered into a joint venture arrangement,
Columbus Joint Venture, with certain of our affiliates, to construct and hold
one restaurant property. As of March 31, 1999, the Income Fund had contributed
approximately $239,700, of which approximately $124,400 was contributed during
the quarter ended March 31, 1999, to the joint venture to purchase land and pay
for construction costs relating to the joint venture. As of March 31, 1999, the
Income Fund owned an approximate 28% interest in the profits and losses of the
joint venture.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending, such as demand deposit accounts at commercial banks, CDs
and money market accounts with less than a 30-day maturity date, the Income
Fund's use of such funds to pay Income Fund expenses or to make distributions
to the partners. At March 31, 1999, the Income Fund had $2,000,725 invested in
such short-term investments, as compared to $2,362,980 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The decrease in cash and cash equivalents for the quarter ended
March 31, 1999, is partially attributable to the payment of a special
distribution to the Limited Partners of $135,000 in January 1999 of cumulative
excess of operating reserves. In addition, the decrease is partially due to the
Income Fund funding additional amounts to Columbus Joint Venture to pay
construction costs relating to the joint venture. The funds remaining at March
31, 1999, after payment of distributions and other liabilities, will be used to
acquire an additional restaurant property and to meet the Income Fund's working
capital, including acquisition and development of restaurant properties, and
other needs.
Total liabilities of the Income Fund decreased to $1,061,856 at March 31,
1999, from $1,244,057 at December 31, 1998, primarily as a result of the Income
Fund accruing a special distribution payable to the Limited Partners of
$135,000 at December 31, 1998, as described above, which was paid in January
1999. The decrease is also partially attributable to a decrease in rents paid
in advance at March 31, 1999. We believe that the Income Fund has sufficient
cash on hand to meet its current working capital needs.
In March 31, 1999, the Income Fund entered into an agreement with an
unrelated third party to sell the Long John Silver's restaurant property in
Morganton, North Carolina. We believe that the anticipated sales
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price will exceed the Income Fund's cost attributable to the restaurant
property; however, as of May 13, 1999, the sale had not occurred.
Based on current cash from operations, and for the quarter ended March 31,
1999, future cash from operations, the Income Fund declared distributions to
the Limited Partners of $956,252 for each of the quarters ended March 31, 1999
and 1998. This represents distributions for each applicable quarter of $0.21
per unit. No distributions were made to us for the quarters ended March 31,
1999 and 1998. No amounts distributed to the Limited Partners for the quarters
ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the CNL Income Funds
filed a lawsuit against us and PAF in connection with the Acquisition. We and
APF believe that the lawsuit is without merit and intend to defend vigorously
against the claims. In addition, on June 22, 1999, one Limited Partner in
several Income Funds filed a class action lawsuit against us, APF, CNL Group,
Inc. and the CNL Restaurant Businesses in connection with the Acquisition. We
and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuits were so recently filed, it
is premature to further comment on the lawsuits at this time.
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 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
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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 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 is invested in
money market accounts or other short-term highly liquid investments 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. 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.
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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and restaurant
property coverage for the Income Fund. This insurance is intended to reduce the
Income Fund's exposure in the unlikely event a tenant's insurance policy lapses
or is insufficient to cover a claim relating to the restaurant property.
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. 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
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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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund owned and leased 44
wholly owned restaurant properties (which included one restaurant property in
Monroe, North Carolina which was sold in December 1998), and during the quarter
ended March 31, 1999, the Income Fund owned and leased 43 wholly owned
restaurant properties to operators of fast-food and family-style restaurant
chains. In connection therewith, during the quarters ended March 31, 1999 and
1998, the Income Fund earned $981,218 and $1,034,220, respectively, in rental
income from operating leases and earned income from direct financing leases
from these restaurant properties. Rental and earned income decreased 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. The Income Fund has continued receiving rental payments
relating to the five leases not rejected by the tenant. In December 1998, the
Income Fund sold one of the vacant restaurant properties 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 the two remaining 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. We are currently seeking either new tenants
or buyers for the two remaining vacant restaurant properties. While Long John
Silver's Inc. has not rejected or affirmed the remaining five leases, we cannot
be sure that some or all of the leases will not be rejected in the future. The
lost revenues resulting from the two remaining vacant restaurant properties,
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 is
not able to re-lease these restaurant properties in a timely manner.
In addition, during the quarter ended March 31, 1998, the Income Fund owned
and leased four restaurant properties indirectly through joint venture
arrangements and during the quarter ended March 31, 1999, the Income Fund owned
and leased five restaurant properties indirectly through joint venture
arrangements. In connection therewith, during the quarters ended March 31, 1999
and 1998, the Income Fund earned $71,138 and $65,650, respectively,
attributable to net income earned by joint ventures. The increase in net income
earned by joint ventures during the quarter ended March 31, 1999, is primarily
due to the fact that in August 1998, the Income Fund invested in Columbus Joint
Venture, as described above in "Liquidity and Capital Resources."
Operating expenses, including depreciation and amortization expense, were
$211,969 and $164,241 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, was partially a
result of the Income Fund incurring $35,419 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 "Liquidity
and Capital Resources." 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 ended
March 31, 1999, is partially attributable to the fact that the Income Fund
accrued insurance and real estate tax expenses on the two remaining rejected
and vacant restaurant properties 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 ended March 31, 1999, is partially attributable to
an increase in depreciation expenses due to the fact that during 1998, the
Income Fund
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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 the two remaining, vacant restaurant properties until new tenants
or buyers are located. The Income Fund is currently seeking either new tenants
or purchasers for these two 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 five restaurant properties still
leased by Long John Silver's Inc. if one or more of the leases are rejected.
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 (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 "Liquidity and 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 "Liquidity and Capital
Resources."
In addition, rental and earned income also decreased approximately $23,500
during 1997 as a result of the fact that the tenant of the 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.
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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 "Liquidity and 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
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
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$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 "Liquidity
and 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 "Liquidity and 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.
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.
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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
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. As of March 31, 1999, the Income Fund did
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 the restaurant
properties in accordance with the terms of the Income Fund's leases.
In early 1998, we and our affiliates formed a Year 2000 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
restaurant property management. The Y2K Team's initial step in assessing the
Income Fund's Year 2000 readiness consists of identifying any systems that are
date-sensitive and, accordingly, could have potential Year 2000 problems. The
Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue to receive positive responses from the
companies with which the Income Fund has third party relationships regarding
their Year 2000 compliance, we cannot be sure that the tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 used in the business
activities and operations of the Income Fund, to be completed by September 30,
1999, although, we cannot be sure that the upgrade solutions provided by the
vendors have addressed all possible Year 2000 issues. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
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We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be sure that the transfer agent has addressed all possible Year
2000 issues. 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
Income Fund.
Based upon the progress that we and our affiliates have made in addressing
the Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations (which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $788,735 and
$989,648 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, 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.
Currently, rental income from the Income Fund's restaurant properties is
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 the partners. At March 31, 1999, the Income Fund had $687,717 invested in
such short-term investments, as compared to $766,859 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The funds remaining at March 31, 1999 will be used to pay
distributions and other liabilities.
Total liabilities of the Income Fund, including distributions payable,
increased to $950,979 at March 31, 1999, from $938,090 at December 31, 1998.
Liabilities at March 31, 1999, to the extent they exceed cash and cash
equivalents at March 31, 1999, will be paid from future cash from operations,
or in the event that we elect to make capital contributions or loans, from
future general partner contributions or loans.
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 have been incurred as of March 31,
1999. 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
restaurant property as an Arby's restaurant. In connection therewith, the
Income Fund agreed to pay up to $975,000 in renovation costs. The Income Fund
anticipates funding these renovation costs by entering into arrangements with
certain of our affiliates or third parties. Under the arrangements, certain of
our affiliates or third parties would contribute the proceeds to pay for the
renovation costs in exchange for interests in the restaurant properties. As of
May 13, 1999, the Income Fund has not entered into any such arrangements.
Based primarily on cash from operations, and for the quarter ended March 31,
1999, anticipated future cash from operations, the Income Fund declared
distributions to the Limited Partners of $850,002 for each of
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the quarters ended March 31, 1999 and 1998. This represents distributions of
$0.21 per unit for each applicable quarter. No distributions were made to us
for the quarters ended March 31, 1999 and 1998. No amounts distributed to the
Limited Partners for the quarters ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the CNL Income Funds
filed a lawsuit against us and APF in connection with the proposed Acquisition.
We and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. In addition, on June 22, 1999, one Limited
Partner in several Income Funds filed a class action lawsuit against us, APF,
CNL Group, Inc. and the CNL Restaurant Businesses in connection with the
Acquisition. We and APF believe that the lawsuit is without merit and intend to
defend vigorously against the claims. Because the lawsuits were so recently
filed, it is premature to further comment on the lawsuits at this time.
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
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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 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 is invested in
money market accounts or other short-term highly liquid investments 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.
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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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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.
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 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During each of the quarters ended March 31, 1999 and 1998, the Income Fund
owned and leased 42 wholly owned restaurant properties to operators of national
and regional restaurant chains. In connection therewith, during the quarters
ended March 31, 1999 and 1998, the Income Fund earned $789,395 and $835,550,
respectively, in rental income from operating leases and earned income from
direct financing leases from these restaurant properties. The decrease in
rental and earned income is 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 has continued to receive rental
payments relating to the leases not rejected by the tenant. During 1998, the
Income Fund re-leased two of these restaurant properties to new tenants. Rental
payments commenced in December 1998, for one lease and rental payments on the
other lease are scheduled to commence during the second quarter of 1999. In
addition, in May 1999, the Income Fund released the remaining vacant restaurant
property to a new tenant, to renovate the restaurant property into an Arby's
restaurant, as described above in "Liquidity and Capital Resources." While Long
John Silver's, Inc. has not rejected or affirmed the remaining five leases, we
cannot be sure that some or all of the leases will not be rejected in the
future. The lost revenues resulting from 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 is not able to re-lease these restaurant
properties in a timely manner.
During the quarter ended March 31, 1999 and 1998, the Income Fund also
earned $40,605 and $65,923, respectively, in contingent rental income. The
decrease in contingent rental income during the quarter ended March 31, 1999,
as compared to the quarter ended March 31, 1998, is primarily attributable to
the fact that during the quarter ended March 31, 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 quarters ended March 31, 1999 and 1998, the Income Fund also
owned and leased two restaurant properties indirectly through joint venture
arrangements and three restaurant properties with certain of our affiliates as
tenants-in-common. In connection therewith, during the quarters ended March 31,
1999 and 1998, the Income Fund earned $60,227 and $64,307, respectively,
attributable to the net income earned by these joint ventures.
During the quarter ended March 31, 1999, five of the Income Fund's lessees,
Flagstar Enterprises, Inc., Long John Silver's, Inc., Golden Corral
Corporation, Checkers Drive-In Restaurants, 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 restaurant properties owned by
joint ventures and restaurant properties owned with affiliates of the general
partners as tenants-in-common). As of March 31, 1999, Flagstar Enterprises,
Inc. was the lessee under leases relating to 11 restaurants, Long John
Silver's, Inc. was the lessee under leases relating to five restaurants (which
excludes the one vacant restaurant for which Long John Silver's, Inc. rejected
the lease as a
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result of filing for bankruptcy, as described above), Golden Corral Corporation
was the lessee under leases relating to three restaurants, Checkers Drive-In
Restaurants was the lessee under leases relating to eight restaurants, and
Foodmaker, Inc. was the lessee under leases relating to five restaurants. As a
result of Long John Silver's Inc. filing for bankruptcy in June 1998, as
described above, it is anticipated that based on the minimum rental payments
required by the leases, Flagstar Enterprises, Inc., Golden Corral Corporation,
Checkers Drive-In Restaurants, and Foodmaker, Inc. each will continue to
contribute more than 10% of the Income Fund's total rental and earned income.
In addition, during the quarter ended March 31, 1999, six restaurant chains,
Long John Silver's, Hardee's, Golden Corral, Jack in the Box, Checkers, and
Burger King, each accounted for more than 10% of the Income Fund's total rental
income (including the Income Fund's share of rental income from restaurant
properties owned by joint ventures and restaurant properties owned with
affiliates as tenants-in-common). It is anticipated that Hardee's, Golden
Corral, Jack in the Box, Checkers, and Burger King, each will continue to
account for more than 10% 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
$228,992 and $161,823 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, is partially
attributable to 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, 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 to renovate the restaurant property into an
Arby's restaurant, as described above in "Liquidity and Capital Resources." In
accordance with the lease agreement, 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. The Income Fund
will continue to incur these expenses relating to the restaurant properties
that are expected to be converted into a Steak-N-Shake and an Arby's, until the
conversion of each restaurant property is completed, at which point each tenant
will be responsible for these expenses under the terms of their individual
leases. 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. In addition,
the increase in operating expenses is partially due 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 building on operating leases.
In addition, the increase in operating expenses during the quarter ended
March 31, 1999, is partially due to the fact that the Income Fund incurred
$33,181 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 "Liquidity and Capital Resources." 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 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
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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, as described above. 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 (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 "Liquidity and 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 "Liquidity and 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 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
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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
"Liquidity and 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 "Liquidity and 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).
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 "Liquidity and 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 "Liquidity and 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, as described
above. 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.
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 proposed Acquisition with APF, as described above in "Liquidity
and Capital Resources."
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.
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As a result of the sale of the restaurant property in Orlando, Florida, as
described above in "Liquidity and 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 "Liquidity and 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
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. As of March 31, 1999, the Income Fund did
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 the restaurant
properties in accordance with the terms of the Income Fund's leases.
In early 1998, we and our affiliates formed a Year 2000 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
restaurant property management. The Y2K Team's initial step in assessing the
Income Fund's Year 2000 readiness consists of identifying any systems that are
date-sensitive and, accordingly, could have potential Year 2000 problems. The
Y2K Team is in the process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue to receive positive responses from the
companies with which the Income Fund has third party relationships regarding
their Year 2000 compliance, we cannot be sure that the tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
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We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 used in the business
activities and operations of the Income Fund, to be completed by September 30,
1999, although, we cannot be sure that the upgrade solutions provided by the
vendors have addressed all possible Year 2000 issues. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be sure that the transfer agent has addressed all possible Year
2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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 March 31, 1999, the Income Fund owned 57 restaurant
properties, which included interests in ten restaurant properties owned by
joint ventures in which the Income Fund is a co-venturer.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations (which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $819,872 and
$1,050,016 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, 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 March 31, 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 March 31,
1999, the Income Fund had contributed approximately $539,100, of which
approximately $44,100 was contributed during the quarter ended March 31, 1999,
to the joint venture to purchase land and pay for construction costs relating
to the joint venture. As of March 31, 1999 the Income Fund owned a 50% interest
in the profits and losses of the joint venture.
Currently, rental income from the Income Fund's restaurant properties is
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 the partners. At March 31, 1999, the Income Fund had $763,678 invested in
such short-term investments, as compared to $949,056 at December 31, 1998. As
of March 31, 1999, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
2.18% annually. The funds remaining at March 31, 1999 will be used to pay
distributions and other liabilities.
Total liabilities of the Income Fund, including distributions payable,
increased to $1,034,664 at March 31, 1999, from $1,062,435 at December 31,
1998. Total liabilities at March 31, 1999, to the extent they exceed cash and
cash equivalents at March 31, 1999, will be paid from future cash from
operations, and in the event that we elect to make additional contributions,
from future general partner contributions.
In February 1999, the Income Fund entered into an agreement with an
unrelated third party to sell the Long John Silver's restaurant property in
Stockbridge, Georgia. At March 31, 1999, the Income Fund established a
provision for loss on building related to the anticipated sale of this
restaurant property. As of May 13, 1999, the sale had not occurred.
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Based on cash from operations and for the quarter ended March 31, 1999,
future cash from operations, the Income Fund declared distributions to the
Limited Partners of $928,130 for each of the quarters ended March 31, 1999 and
1998. This represents distributions for each applicable quarter of $0.21 per
unit. No distributions were made to us for the quarters ended March 31, 1999
and 1998. No amounts distributed to the Limited Partners for the quarters ended
March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the CNL Income Funds
filed a lawsuit against us and APF in connection with the proposed Acquisition.
We and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. In addition, on June 22, 1999, one Limited
Partner in several Income Funds filed a class action lawsuit against us, APF,
CNL Group, Inc. and the CNL Restaurant Businesses in connection with the
Acquisition. We and APF believe that the lawsuit is without merit and intend to
defend vigorously against the claims. Because the lawsuits were so recently
filed, it is premature to further comment on the lawsuits at this time.
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% 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% interest in the profits and losses of the joint venture.
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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 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.
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Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments 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.
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.
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. 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.
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.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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.
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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarter ended March 31, 1998, the Income Fund owned and leased 49
wholly owned restaurant properties (which included three restaurant properties
which were sold during 1998), and during the quarter ended March 31, 1999, the
Income Fund owned and leased 47 wholly owned restaurant properties to operators
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of fast-food and family-style restaurant chains. In connection therewith,
during the quarters ended March 31, 1999 and 1998, the Income Fund earned
$905,972 and $959,496, respectively, in rental income from operating leases and
earned income from direct financing leases from these restaurant properties.
The decrease in rental and earned income during the quarter ended March 31,
1999, as compared to the quarter ended March 31, 1998, is primarily
attributable to a decrease of approximately $91,200 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 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. The Income Fund has entered
into new leases, each with a new tenant, for two of the four vacant restaurant
properties. In connection therewith, the tenant for each restaurant property
has agreed to pay for all costs necessary to convert these restaurant
properties into different restaurant chains. Conversion of one of these
restaurant properties was completed in March 1999, at which time rental
payments commenced, and conversion of the second restaurant property is
expected to be completed during the second quarter of 1999, at which time
rental payments are expected to commence for that restaurant property. The
Income Fund will not recognize any rental and earned income from these two
remaining vacant restaurant properties until replacement tenants for these
restaurant properties are located, or until the restaurant properties are sold
and proceeds from such sales are reinvested in additional restaurant
properties. We are currently seeking either replacement tenants or purchasers
of the two remaining, vacant restaurant 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 two remaining vacant restaurant
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
Income Fund, if the Income Fund is not able to re-lease these restaurant
properties in a timely manner.
In addition, rental and earned income decreased by approximately $16,100
during the quarter ended March 31, 1999, as compared to the quarter ended March
31, 1998, as a result of the 1998 sales of the restaurant properties in
Madison, Alabama and Richmond, Virginia. 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.
The Income Fund reinvested the remaining net sales proceeds from the sale of
the above restaurant properties in Melbourne Joint Venture, as described below.
In addition, during the quarters ended March 31, 1999 and 1998, the Income
Fund owned and leased 10 and nine restaurant properties indirectly through
joint venture arrangements, respectively. In connection therewith, during the
quarters ended March 31, 1999 and 1998, the Income Fund earned $93,686 and
$82,505, respectively, attributable to net income earned by these joint
ventures. The increase in net income earned by joint ventures during the
quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998,
is primarily attributable to the Income Fund investing in Melbourne Joint
Venture in April 1998.
In addition, during the quarters ended March 31, 1999 and 1998, the Income
Fund earned $10,520 and $20,979, respectively, in interest and other income.
Interest and other income during the quarter ended March 31, 1998 was higher
than that earned during the quarter ended March 31, 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
the reinvestment of the net sales proceeds in additional restaurant properties.
These net sales proceeds were reinvested in October 1998.
Operating expenses, including depreciation and amortization expense, were
$238,000 and $161,490 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, is primarily
attributable to the fact that during the quarter ended March 31, 1999, 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 the quarter
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ended March 31, 1999, 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. The Income Fund has entered into new leases, each with a new
tenant, for two of the four rejected restaurant properties, as described above.
The new tenants are responsible for real estate taxes, insurance, and
maintenance relating to the 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. The Income Fund is currently seeking either new
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 five restaurant properties still
leased by Long John Silver's, Inc. if one or more of the leases are rejected.
In addition, the increase in operating expenses during the quarter ended
March 31, 1999, as compared to the quarter ended March 31, 1998, is also
partially due to the fact that the Income Fund incurred $33,175 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 "Liquidity and Capital Resources." 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 the
transaction costs based upon the percentage of "Against" votes and abstentions.
In addition, the increase in operating expenses during the quarter ended
March 31, 1999 is partially attributable to an increase in state taxes 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.
At March 31, 1999, the Income Fund recorded a provision for loss on building
in the amount of $60,882 for financial reporting purposes relating to a Long
John Silver's restaurant property in Stockbridge, Georgia 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 March 31, 1999 and the estimated
net sales proceeds from the sale of the restaurant property based on a purchase
and 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.
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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 (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 "Liquidity and 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 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%
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 "Liquidity and 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% 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
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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% 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% 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% 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. 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 "Liquidity and 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 "Liquidity and 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
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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 "Liquidity and 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
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. As of March 31, 1999, The Income Fund did
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 severs 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 the restaurant properties in accordance
with the terms of the Income Fund's leases.
In early 1998, we and our affiliates formed a Year 2000 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. The Y2K Team's initial step in assessing the Income Fund's Year
2000 readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of
the Income Fund's systems could have a potential Year 2000 problem.
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The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue to receive positive responses from the
companies with which the Income Fund has third party relationships regarding
their Year 2000 compliance, we cannot be sure that the tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 used in the business
activities and operations of the Income Fund, to be completed by September 30,
1999, although, we cannot be sure that the upgrade solutions provided by the
vendors have addressed all possible Year 2000 issues. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be sure that the transfer agent has addressed all possible Year
2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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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
March 31, 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March 31,
1999 and 1998, was cash from operations (which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $682,639 and
$987,824 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, 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.
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 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 the partners. At March 31, 1999, the Income Fund had
$1,097,083 invested in such short-term investments, as compared to $1,214,444
at December 31, 1998. As of March 31, 1999, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately 2.18% annually. The funds remaining at March 31, 1999, after
payment of distributions and other liabilities, will be used meet the Income
Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $876,618 at March 31, 1999, from $893,154 at December 31, 1998.
The general partners believe that the Income Fund has sufficient cash on hand
to meet its current working capital needs, including acquisition and
development of restaurant properties.
Based on current and anticipated future cash from operations, and for the
quarter ended March 31, 1998, accumulated excess operating reserves, the Income
Fund declared distributions to Limited Partners of $800,000 and $1,000,000 for
the quarters ended March 31, 1999 and 1998, respectively. This represents
distributions of $0.20 and $0.25 per unit for the quarters ended March 31, 1999
and 1998, respectively. No distributions were made to us for the quarters ended
March 31, 1999 and 1998. No amounts distributed to the Limited Partners for the
quarters ended March 31, 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.
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.
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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.
On May 5, 1999, four Limited Partners in several of the CNL Income Funds
filed a lawsuit against us and APF in connection with the proposed Acquisition.
We and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. In addition, on June 22, 1999, one Limited
Partner in several Income Funds filed a class action lawsuit against us, APF,
CNL Group, Inc. and the CNL Restaurant Businesses in connection with the
Acquisition. We and APF believe that the lawsuit is without merit and intend to
defend vigorously against the claims. Because the lawsuits were so recently
filed, it is premature to further comment on the lawsuits at this time.
The Years Ended December 31, 1998, 1997 and 1996
Currently, 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 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.
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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 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.
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 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.
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.
We believe that the restaurant properties are adequately covers by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim to the restaurant property.
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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased 42 wholly owned restaurant properties to operators of fast-food and
family-style restaurant chains. In connection therewith, during the quarters
ended March 31, 1999 and 1998, the Income Fund earned $804,208 and $894,940,
respectively, in rental income from operating leases and earned income from
direct financing leases
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from these restaurant properties. The decrease in rental and earned income
during the quarter ended March 31, 1999, as compared to the quarter ended March
31, 1998, is 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 they lease. 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. The Income
Fund will not recognize rental and earned income from the 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 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 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.
For the quarters ended March 31, 1999 and 1998, the Income Fund also owned
and leased six restaurant properties indirectly through one joint venture
arrangement and one restaurant property as tenants-in-common with certain of
our affiliates. For the quarter ended March 31, 1999, the Income Fund also
owned and leased one additional restaurant property as tenants-in-common with
one of our affiliates. In connection therewith, during the quarters ended March
31, 1999 and 1998, the Income Fund earned $61,901 and $59,745, respectively,
attributable to net income earned by these joint ventures.
Operating expenses, including depreciation and amortization expense, were
$195,172 and $127,409 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, is partially
attributable to the fact that the Income Fund accrued insurance and real estate
taxes of approximately $9,000 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 is partially
attributable to an increase of approximately $13,400 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 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 is also partially due to the fact that
the Income Fund incurred $32,820 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 "Liquidity and Capital
Resources." 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
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
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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 (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 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 (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 "Liquidity and 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
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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. 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
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. As of March 31, 1999, the Income Fund does
not have any information or non-information technology systems. We and our
affiliates
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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 the restaurant properties in accordance
with the terms of the Income Fund's leases.
In early 1998, we and our affiliates formed a Year 2000 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. The Y2K Team's initial step in assessing the Income Fund's Year
2000 readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting 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 is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue to receive positive responses from the
companies with which the Income Fund has third party relationships regarding
their Year 2000 compliance, we cannot be sure that the tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 used in the business
activities and operations of the Income Fund, to be completed by September 30,
1999, although, we cannot be sure that the upgrade solutions provided by the
vendors have addressed all possible Year 2000 issues. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be sure that the transfer agent has addressed all possible Year
2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year
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2000 compliance at this time. We and our affiliates plan to address their
significant Year 2000 issues prior to the Income Fund being affected by them;
therefore, we have not developed a comprehensive contingency plan. However, if
we and our affiliates identify significant risks related to their Year 2000
compliance, or if their progress deviates from the anticipated timeline, we and
our affiliates will develop contingency plans as deemed necessary at that time.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XVI, 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 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 triple-net leases, with the
lessee responsible for all repairs and maintenance, property taxes, insurance
and utilities. As of March 31, 1999, the Income Fund owned 44 restaurant
properties, which included one restaurant property 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.
Liquidity and Capital Resources
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
The Income Fund's primary source of capital for the quarters ended March
31, 1999 and 1998, was cash from operations (which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $847,198 and
$1,091,044 for the quarters ended March 31, 1999 and 1998, respectively. The
decrease in cash from operations for the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, 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 nine
months ended March 31, 1999.
In August 1998, the Income Fund entered into a joint venture arrangement,
Columbus Joint Venture, with certain of our affiliates, to construct and hold
one restaurant property. As of March 31, 1999, the Income Fund had contributed
approximately $279,800, of which approximately $145,200 was contributed during
the quarter ended March 31, 1999, to purchase land and pay for construction
costs relating to the joint venture. As of March 31, 1999, the Income Fund
owned an approximate 32% interest in the profits and losses of the joint
venture.
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 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 the partners. At March 31, 1999, the Income Fund had
$1,405,552 invested in such short-term investments, as compared to $1,603,589
at December 31, 1998. As of March 31, 1999, the average interest rate earned
on the rental income deposited in demand deposit accounts at commercial banks
was approximately 2.18% annually. Cash and cash equivalents decreased during
the quarter ended March 31, 1999, primarily as a result of the Income Fund
funding additional amounts to Columbus Joint Venture to pay for construction
costs relating to the joint venture. The funds remaining at March 31, 1999,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital, including acquisition and development of
restaurant properties, commitment, and other needs.
Total liabilities of the Income Fund, including distributions payable,
increased to $1,036,151 at March 31, 1999, from $996,717 at December 31, 1998.
The increase in liabilities at March 31, 1999 is partially a result of the
Income Fund accruing real estate taxes due to the fact that the tenants of
certain Long John Silver's and Boston Market restaurant properties filed for
bankruptcy as described below in "Results of Operations." In addition, the
increase in liabilities at March 31, 1999 is partially a result of the Income
Fund accruing
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transaction costs relating to the proposed Acquisition, as described below. We
believe that the Income Fund has sufficient cash on hand to meet its current
working capital needs.
In February 1999, the Income Fund entered into a new lease for the
restaurant property located in Las Vegas, Nevada, with a new tenant to operate
the restaurant property as a Big Boy restaurant. In connection therewith, the
Income Fund has agreed to fund up to $150,000 in conversion costs associated
with this restaurant property. No amounts had been incurred as of March 31,
1999.
Based on current and future cash from operations, and for the quarter ended
March 31, 1998, accumulated excess operating reserves, the Income Fund declared
distributions to Limited Partners of $900,000 and $990,000 for the quarters
ended March 31, 1999 and 1998, respectively. This represents distributions of
$0.20 and $0.22 per unit for the quarters ended March 31, 1999 and 1998,
respectively. No distributions were made to us for the quarters ended March 31,
1999 and 1998. No amounts distributed to the Limited Partners for the quarters
ended March 31, 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.
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.
On May 5, 1999, four Limited Partners in several of the CNL Income Funds
filed a lawsuit against us and APF in connection with the proposed Acquisition.
We and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. In addition, on June 22, 1999, on Limited
Partner in several Income Funds filed a class action lawsuit against us, APF,
CNL Group, Inc. and the CNL Restaurant Businesses in connection with the
Acquisition. We and APF believe that the lawsuit is without merit and intend to
defend vigorously against the claims. Because the lawsuits were so recently
filed, it is premature to further comment on the lawsuit at this time.
The Years Ended December 31, 1998, 1997 and 1996
Currently, the Income Fund's primary source of capital is cash from
operations (which includes cash received from tenants, distributions from the
joint venture and interest received, less cash paid for expenses). Cash from
operations was $3,623,694, $3,780,424, and $3,753,726 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 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.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
During the year ended December 31, 1996, the Income Fund used its remaining
net offering proceeds to acquire two additional restaurant properties (one of
which was undeveloped land on which a restaurant was constructed), and to
establish a working capital reserve of approximately $60,000 for Income Fund
purposes.
As a result of the Income Fund's tenant selling its restaurant business
located on the Income Fund's restaurant property in Appleton, Wisconsin, in
April 1996, the Income Fund sold its restaurant property for $775,000,
resulting in a gain for financial reporting purposes of $124,305. This
restaurant property was originally acquired by the Income Fund in February 1995
and had a cost of approximately $595,100, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant
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property for approximately $179,900 in excess of its original purchase price.
In October 1996, the Income Fund reinvested the net sales proceeds in a Boston
Market restaurant property in Fayetteville, North Carolina, as tenants-in-
common with one of our affiliates. 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 each co-
venturer's interest. The Income Fund owns an 80.44% interest in the restaurant
property. The sale of the restaurant property in Appleton, Wisconsin, 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 March 1997, the Income Fund sold its restaurant 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 restaurant property
was originally acquired by the Income Fund in November 1994 and had a cost of
approximately $509,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $100,700 in excess of its original purchase price. In January
1998, the Income Fund reinvested that net sales proceeds in an IHOP restaurant
property in Memphis, Tennessee, as tenants-in-common with certain of our
affiliates. 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 each co-venturer's interest. The
Income Fund owns a 40.42% interest in the restaurant property.
In April 1998, the Income Fund received approximately $162,000 from the
developer of the restaurant property in Farmington, New Mexico. This represents
a reimbursement from the developer upon final reconciliation of the total
construction costs to the total construction costs funded by the Income Fund in
accordance with the development agreement. In August 1998, the Income Fund
entered into a joint venture arrangement, Columbus Joint Venture, with certain
of our affiliates, to construct and hold one restaurant property, as described
above.
None of the restaurant properties owned by the Income Fund 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. In addition, the Income Fund
will not borrow unless it first obtains an opinion of counsel that such
borrowing will not constitute acquisition indebtedness. 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
are invested in money market accounts or other short-term, highly liquid
investments 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 $1,603,589 invested in such short-term investments as compared to
$1,673,869 at December 31, 1997. 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.
In addition, during 1996, the affiliates incurred on behalf of the Income
Fund $9,356 for certain acquisition expenses and during the years ended
December 31, 1998, 1997, and 1996, the affiliates incurred $125,080, $84,319,
and $105,144, respectively, for certain operating expenses. As of December 31,
1998 and 1997, the Income Fund owed $26,476 and $3,351, 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
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affiliates all such amounts. Other liabilities, including distributions
payable, decreased to $970,241 at December 31, 1998, from $1,030,043 at
December 31, 1997, primarily as a result of the payment during the year ended
December 31, 1998, of construction costs accrued for certain restaurant
properties at December 31, 1997. The Income Fund intends to continue to make
distributions of cash available for distribution to limited partners on a
quarterly basis.
Based on cash from operations, and for the year ended December 31, 1998,
cumulative excess operating reserves, the Income Fund declared distributions to
the Limited Partners of $3,690,000, $3,600,000, and $3,543,751 for the years
ended December 31, 1998, 1997, and 1996, respectively. This represents
distributions of $0.82, $0.80, and $0.79 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'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 believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
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 needs.
Results of Operations
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
During the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased 41 wholly owned restaurant properties, to operators of fast-food and
family-style restaurant chains. In connection therewith, during the quarters
ended March 31, 1999 and 1998, the Income Fund earned $931,914 and $1,063,142,
respectively, in rental income from operating leases and earned income from
direct financing leases from these restaurant properties. Rental and earned
income decreased approximately $87,000 during the quarter ended March 31, 1999,
as compared to the quarter ended March 31, 1998, as a result of the fact that
in 1998, three tenants, Long John Silver's, Inc., Finest Foodservice, L.L.C.,
and Boston Chicken, Inc., filed for bankruptcy and rejected the leases relating
to four of the seven restaurant properties leased by these tenants. As a
result, these tenants 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 tenants. In March 1999, the Income Fund entered into
a new lease with a new tenant for one of the vacant restaurant properties for
which rental payments commenced in April 1999. We are currently seeking either
new tenants or purchasers for the three remaining rejected and vacant
restaurant properties. The Income Fund will not recognize any rental and earned
income from these 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. While the tenants have not rejected or affirmed the remaining three
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
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three rejected and vacant restaurant properties and the possible rejection of
the three remaining leases 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 properties in a timely manner.
In addition, rental and earned income decreased during the quarter ended
March 31, 1999 by approximately $38,900, partially as a result of the fact that
in July 1998, the tenant of the Shoney's restaurant property in Las Vegas,
Nevada vacated the restaurant property and ceased making rental payments on
this restaurant property. The Income Fund established an allowance for doubtful
accounts during the quarter ended March 31, 1999 of approximately $20,700 for
rental and earned income amounts due from this tenant due to the fact that
collection of such amounts is questionable. We are pursuing collection of past
due amounts from the former tenant, and will recognize such amounts as income
if collected. In February 1999, the Income Fund entered into a new lease with a
new tenant for this restaurant property for which rental payments are expected
to commence during the second quarter of 1999.
During the quarters ended March 31, 1999 and 1998, the Income Fund owned and
leased two restaurant properties with certain of our affiliates as tenants-in-
common and during the quarter ended March 31, 1999, the Income Fund owned and
leased one additional restaurant property indirectly through a joint venture
arrangement. In connection therewith, during the quarters ended March 31, 1999
and 1998, the Income Fund earned $37,806 and $31,434, respectively,
attributable to net income earned by these joint ventures. The increase in net
income earned by joint ventures was primarily attributable to the fact that in
August 1998, the Income Fund invested in Columbus Joint Venture with certain of
our affiliates.
Operating expenses, including depreciation and amortization expense, were
$284,277 and $212,642 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to March 31, 1998, is partially due to the fact that the
Income Fund incurred $33,158 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 "Liquidity and Capital
Resources." 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 "August" votes and abstentions.
In addition, the increase in operating expenses during the quarter ended
March 31, 1999, is partially due to the fact that the Income Fund incurred
certain expenses, such as real estate taxes, insurance, and maintenance
relating to a Shoney's restaurant property, two Boston Market restaurant
properties and two Long John Silver's restaurant properties which became vacant
during the second and third quarters of 1998, due to financial difficulties or
bankruptcies, as described above. In February and March 1999, the Income Fund
entered into new leases with new tenants, for the Shoney's restaurant property
in Las Vegas, Nevada and a Long John Silver's restaurant property in Celina,
Ohio, respectively. The new tenants are responsible for real estate taxes,
insurance, and maintenance relating to the respective restaurant properties;
therefore, we do not anticipate that 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 related to the three remaining vacant restaurant properties
until new tenants for these restaurant properties are located or until the
restaurant properties are sold. The Income Fund is currently seeking new
tenants or buyers 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 three restaurant properties still
leased by Long John Silver's, Inc., Finest Foodservice, L.L.C., and Boston
Chicken, Inc., if one or more of the leases are rejected.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund owned and leased 43 wholly-owned restaurant properties
(including one restaurant property in Appleton, Wisconsin, which was sold in
April 1996) during 1996, 42 wholly-owned restaurant properties (including one
restaurant property in Oviedo, Florida, which was sold in March 1997) during
1997,
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and 43 wholly-owned restaurant properties (including two restaurant properties
in Madison and Chattanooga, Tennessee exchanged for two restaurant properties
in Lawrence, Kansas and Indianapolis, Indiana), during 1998. In addition,
during 1997 and 1996, the Income Fund owned and leased one restaurant property
with an affiliate, as tenants-in-common, and during 1998, the Income Fund was a
co-venturer in a joint venture arrangement that owned and leased one restaurant
property, and 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, as tenants-in-common or through a joint venture
arrangement, 44 restaurant properties which are generally subject to long-term,
triple-net leases that provide for minimum base annual rental amounts (payable
in monthly installments) ranging from approximately $21,600 to $220,600. 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 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 $3,864,121, $4,266,069, and $4,297,558, 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 partially attributable to the fact that in July 1998, the
tenant of the Shoney's restaurant property in Las Vegas, Nevada ceased
restaurant operations and vacated the restaurant property. The Income Fund
established an allowance for doubtful accounts during 1998 of approximately
$82,500 for rental and earned income amounts due from this tenant due to the
fact that collection of such amounts is questionable. We are pursing collection
of past due amounts from the former tenant, and will recognize such amounts as
income if collected. In February 1999, the Income Fund entered into a new lease
with a new tenant for this restaurant property. In addition, during 1998, the
Income Fund wrote off approximately $77,300 of accrued rental income (non-cash
accounting adjustments relating to the straight-lining of future scheduled rent
increases over the lease term in accordance with generally accepted accounting
principles) relating to this restaurant property.
In addition, rental and earned income decreased approximately $110,500
during 1998 as a result of the fact that in 1998, three tenants, Long John
Silver's, Inc., Finest Foodservice, L.L.C., and Boston Chicken, Inc., filed for
bankruptcy and rejected the leases relating to four of the seven restaurant
properties leased by these tenants, as described above. The Income Fund has
continued receiving rental payments relating to the leases not rejected by the
tenants. In conjunction with the four rejected leases, during 1998 the Income
Fund wrote off approximately $107,000 of accrued rental income (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.
In addition, the decrease in rental and earned income during 1998 and 1997,
each as compared to the previous year, is partially the result of a decrease in
rental income due to the sale of the restaurant property in Oviedo, Florida, in
March 1997. The net sales proceeds were reinvested in a restaurant property in
Memphis, Tennessee, with certain of our affiliates as tenants-in-common,
resulting in an increase in equity in earnings of joint venture, as described
below. In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is a result of the sale of the restaurant property in
Appleton, Wisconsin in April 1996. The decrease during 1997 as compared to 1996
is partially offset by the acquisition of two additional restaurant properties
in 1996 that were operational for a full year in 1997, as compared to a partial
year in 1996.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $132,002, $73,507, and $19,668, respectively, attributable
to net income earned by joint ventures. The increase in net income earned by
joint ventures during 1998, as compared to 1997, is primarily attributable to
the fact that in January 1998, the Income Fund reinvested the net sales
proceeds it received from the 1997 sale of the restaurant property in Oviedo,
Florida, in an IHOP restaurant property in Memphis, Tennessee, with certain of
our affiliates as tenants-in-common. The increase during 1997, as compared to
1996, is primarily attributable to the fact that in October 1996, the Income
Fund reinvested the net sales proceeds it received from the sale of the
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restaurant property in Appleton, Wisconsin, in a restaurant property in
Fayetteville, North Carolina, with certain of our affiliates. This restaurant
property was operational for a full year in 1997, as compared to a partial year
in 1996.
During the year ended December 31, 1998, three lessees of the Income Fund,
Golden Corral Corporation, Foodmaker, Inc., and DenAmerica Corp. each
contributed more than 10% of the Income Fund's total rental income (including
the Income Fund's share of rental income from the restaurant property owned by
a joint venture and the 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 six restaurants, Foodmaker, Inc. was the lessee
under leases relating to five restaurants, and DenAmerica Corp. was the lessee
under leases relating to nine restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, each of
these lessees 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, four restaurant chains, Golden Corral, Jack in the Box, Boston Market,
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 the restaurant
property owned by a joint venture and the two restaurant properties owned with
affiliates as tenants-in-common). During 1998, the tenants of four Boston
Market restaurant properties filed for bankruptcy as described below. In 1999,
it is anticipated that Golden Corral, Jack in the Box and Denny's 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. 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.
As described above, during 1998, the tenants of four Boston Market
restaurant properties filed for bankruptcy and rejected the leases relating to
two restaurant properties. The Income Fund will not recognize any rental and
earned income from these restaurant properties until new tenants for the
restaurant properties are located, or until the restaurant properties are sold
and the proceeds from such sales are reinvested in additional restaurant
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
Income Fund 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
$850,501, $836,815 and $814,325 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily due to the fact that the Income Fund incurred
$24,652 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 "Liquidity and Capital Resources."
The increase in operating expenses during 1998 is partially offset by a
decrease in depreciation expense as a result of the reimbursement of
construction costs from the developer relating to the restaurant property in
Farmington, New Mexico, which reduced the depreciable basis of land and
building on operating leases during 1998, as described above in "Liquidity and
Capital Resources."
During 1998, the Income Fund incurred certain expenses, such as real estate
taxes, insurance, and maintenance relating to a Shoney's restaurant property,
two Boston Market restaurant properties and two Long John Silver's restaurant
properties which became vacant, as described above. In February 1999, the
Income Fund entered into a new lease with a new tenant for the Shoney's
restaurant property in Las Vegas, Nevada. The new tenant is responsible for
real estate taxes, insurance, and maintenance relating to this restaurant
property; therefore, we do not anticipate that the Income Fund will incur these
expenses for this restaurant property in the future. However, the Income Fund
will continue to incur certain expenses, such as real estate taxes, insurance,
and maintenance related to the four remaining vacant restaurant properties
until new tenants for these restaurant properties are located or until the
restaurant properties are sold. The Income Fund is currently seeking new
tenants or buyers for these restaurant properties.
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The increase in operating expenses during 1997, as compared to 1996, is
partially attributable to an increase in depreciation expense as the result of
the acquisition of additional restaurant properties during 1996, and the fact
that the restaurant properties acquired during 1996 were operational for a full
year in 1997, as compared to a partial year in 1996. Operating expenses also
increased during 1997, as a result of the Income Fund incurring additional
taxes relating to the filing of various state tax returns during 1997.
As a result of the sale of the restaurant property in Oviedo, Florida, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $41,148 for financial reporting purposes for the year
ended December 31, 1997. As a result of the sale of the restaurant property in
Appleton, Wisconsin, as described in "Liquidity and Capital Resources," the
Income Fund recognized a gain for financial reporting purposes of $124,305 for
the year ended December 31, 1996. No restaurant properties were sold during
1998.
During the year ended December 31, 1998, the Income Fund recorded a
provision for loss on building of $266,257 for financial reporting purposes
relating to a Long John Silver's restaurant property in Celina, Ohio. 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 restaurant property's carrying value at December 31,
1998 and the estimated net realizable value for this restaurant property. 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, 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
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. As of March 31, 1999 the Income Fund did
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 the restaurant
properties in accordance with the terms of the Income Fund's leases.
In early 1998, we and our affiliates formed a Year 2000 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. The Y2K Team's initial step in assessing the Income Fund's Year
2000 readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of
the Income Fund's systems could have a potential Year 2000 problem.
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The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team is
in the process of contacting the respective vendors and manufacturers to verify
the Year 2000 compliance of their products. In addition, the Y2K Team has also
requested and is evaluating documentation from other companies with which the
Income Fund has a material third party relationship, including the Income
Fund's tenants, vendors, financial institutions and the Income Fund's transfer
agent. The Income Fund depends on its tenants for rents and cash flows, its
financial institutions for availability of cash and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of our affiliates. Although we continue to receive positive responses from the
companies with which the Income Fund has third party relationships regarding
their Year 2000 compliance, we cannot be sure that the tenants, financial
institutions, transfer agent, other vendors and system providers have
adequately considered the impact of the Year 2000. We are not able to measure
the effect on the operations of the Income Fund of any third party's failure to
adequately address the impact of the Year 2000.
We and our affiliates have identified and have implemented upgrades for
certain hardware equipment. In addition, we and our affiliates have 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 used in the business
activities and operations of the Income Fund, to be completed by September 30,
1999, although, we cannot be sure that the upgrade solutions provided by the
vendors have addressed all possible Year 2000 issues. We do not expect the
aggregate cost of the Year 2000 remedial measures to be material to the results
of operations of the Income Fund.
We and our affiliates have received certification from the Income Fund's
transfer agent of its Year 2000 compliance. Due to the material relationship of
the Income Fund with its transfer agent, the Y2K Team is evaluating the Year
2000 compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, we cannot be sure that the transfer agent has addressed all possible Year
2000 issues. 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
Income Fund.
Based upon the progress we and our affiliates have made in addressing the
Year 2000 issues and their plan and timeline to complete the compliance
program, we do not foresee significant risks associated with Year 2000
compliance at this time. We and our affiliates plan to address our significant
Year 2000 issues prior to the Income Fund being affected by them; therefore, we
have not developed a comprehensive contingency plan. However, if we and our
affiliates identify significant risks related to their Year 2000 compliance, or
if their progress deviates from the anticipated timeline, we and our affiliates
will develop contingency plans as deemed necessary at that time.
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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 March 31, 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, family-style and casual dining
restaurant properties, including land and buildings, as well as restaurant
properties upon which such restaurants would be constructed, the land
underlying the restaurant building, with the building owned by the lessee or a
third party, or the building only with the land owned by 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 selected by the General Partners. 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 property. See "-- Description of Leases --
Computation of Lease Payments."
As is the case with APF, the General Partners 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 certain provisions of the leases
held by the Income Funds. Thus, like APF, 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. In
addition, as with APF's leases, 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 to provide regular cash flow to the Income
Funds. 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.
For a description of the standards which the General Partners have employed
in selecting restaurant chains and particular restaurant properties within a
restaurant chain for investment, see "-- Standards for Investment." 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,
the General Partners 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 mostly
hold restaurant properties in fee.
APF believes 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 will assume 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. This
section describes 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 certain agreements,
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 certain instances, the Advisor
negotiates an assignment of an existing lease if the General Partners, 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. See "-- Description of
Leases" below for a discussion of the terms of the Income Funds' leases. 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 under certain conditions, 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
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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 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 the General Partners of the Income Funds 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 the Advisor, the Income
Funds or the General Partners.
Selection of Restaurant Properties and Lessees. In making investments in
restaurant properties, the Advisor and the General Partners 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, the Advisor and the General Partners 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 is 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.
C-231
<PAGE>
. 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, a Income Fund has not invested 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 March 31, 1999, the Income Funds owned, in the aggregate, 574
restaurant properties, all of which are currently triple-net leased. The
following table provides certain annualized information with respect to the
Funds' restaurant properties owned as of March 31, 1999.
<TABLE>
<CAPTION>
Number of
States in
Total which Average
Number of Restaurant Age of Aggregate Percent
Restaurant Properties Restaurant Total of Total
Income Fund Properties(1) are Located Properties Revenue Revenue
- ----------- ------------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd.... 17 11 13.4 $1,052,000 2.2%
CNL Income Fund II,
Ltd.................... 37 17 12.2 2,163,000 4.5
CNL Income Fund III,
Ltd.................... 28 17 11.4 1,864,000 3.9
CNL Income Fund IV,
Ltd.................... 38 15 11.1 2,458,000 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 3,353,000 7.0
CNL Income Fund VII,
Ltd.................... 40 13 10.3 2,750,000 5.8
CNL Income Fund VIII,
Ltd.................... 36 12 9.9 3,221,000 6.7
CNL Income Fund IX,
Ltd.................... 40 17 9.9 2,938,000 6.1
CNL Income Fund X,
Ltd.................... 49 19 9.3 3,403,000 7.1
CNL Income Fund XI,
Ltd.................... 40 20 8.5 3,763,000 7.9
CNL Income Fund XII,
Ltd.................... 48 15 7.3 4,232,000 8.9
CNL Income Fund XIII,
Ltd.................... 47 17 7.2 3,509,000 7.3
CNL Income Fund XIV,
Ltd.................... 57 16 5.9 4,021,000 8.4
CNL Income Fund XV,
Ltd.................... 50 18 6.5 3,559,000 7.4
CNL Income Fund XVI,
Ltd.................... 44 18 7.5 4,008,000 8.4
</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 574 total restaurant
properties owned by the Income Funds as of March 31, 1999, 65 restaurant
properties were owned through joint ventures or as tenants in common with
affiliates of the Income Funds.
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 generally are located on smaller
parcels if sufficient common parking was available. Restaurant properties
purchased by a Income Fund are in locations zoned for commercial use which were
reviewed for beneficial traffic patterns and volume of traffic. Generally, the
cost of the underlying land ranges from $8,800 to $1,160,000, although the cost
of the land for particular restaurant properties was 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 ranged from
$96,000 to $1,160,000 for each restaurant property.
C-232
<PAGE>
Generally, the restaurant properties acquired by the Income Funds consist of
both land and building, although in a number of cases an Income Fund may have
acquired only the land underlying the restaurant building with the building
owned by a tenant or a third party, and also may have acquired the building
only with the land owned by 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 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 March 31, 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 10 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 1 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 3 -- -- 1 1 -- -- -- 1
Long John Silver's...... -- -- -- -- -- -- -- -- -- 2 -- 8 8 9 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 5 7 6 11 3 2 3 2 3 2 1 4 3 --
</TABLE>
- --------
(1) The 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 574 total restaurant
properties owned by the Income Funds as of March 31, 1999, 65 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.
Description of Leases
This section provides a summary of the leases of the restaurant properties
owned by the Income Funds. 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. The Advisor in all cases used its best
efforts to obtain terms at least as favorable as those described below.
General. All of the Income Funds' leases are 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 certain circumstances in which it may be a party to a
joint venture or co-tenancy arrangement which, in turn,
C-233
<PAGE>
owns the restaurant property. In those cases, the joint venture, rather than
the Income Fund, will be the lessor, and all references in this section to the
Income Fund as lessor therefore should be read accordingly. See "-- Joint
Venture/Co-Tenancy Arrangements."
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 March 31, 1999, the average remaining initial lease term with respect
to the Income Funds' restaurant properties was approximately 12 years. Leases
accounting for approximately 12.6% of annualized base rent for the quarter
ended March 31, 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 $ 148,000 0.3%
2001................................................. 7 493,000 1.0
2002................................................. 13 942,000 1.9
2003................................................. 6 375,000 0.8
2004................................................. 8 1,008,000 2.1
2005................................................. 22 2,635,000 5.5
2006................................................. 29 2,756,000 5.7
2007................................................. 32 2,735,000 5.7
2008................................................. 35 2,704,000 5.6
2009................................................. 30 3,034,000 6.3
2010................................................. 58 4,619,000 9.6
2011................................................. 68 6,237,000 12.9
2012................................................. 61 5,605,000 11.6
2013................................................. 53 4,332,000 9.0
2014................................................. 74 4,546,000 9.4
Thereafter........................................... 58 6,094,000 12.6
--- ----------- -----
Totals(1).......................................... 558 $48,263,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) The leases for 16 properties with aggregate base rental income of
approximately $1,381,000 have expired or been terminated, including three
Boston Market restaurant properties and seven Long John Silver's restaurant
properties. We are actively marketing these properties for re-lease or
sale. This table excludes one lease which expires in 1999 and provides for
annual base rent of approximately $85,000.
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
C-234
<PAGE>
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 certain 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 certain
immaterial structural modifications to the restaurant building and
improvements, with a cost limitation set forth on 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. The General
Partners negotiated only such formulae that they expected would result in
reasonable approximations of the fair market value of the restaurant property
at the time the option is exercised.
Substitution of Restaurant Properties. Certain leases provide the lessee the
right to offer the substitution of another restaurant property selected by the
lessee and improved with the same restaurant chain approved by the landlord in
the event that 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 has 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.
C-235
<PAGE>
Generally, if the Income Fund approves the substitution, a closing shall
take place within 60 days following the Income Fund's approval of the
substitution. The terms of the lease for the substituted restaurant property
shall generally be identical to the terms of the lease as the original
property, except that the lease term shall 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
would adequately insure 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
Certain 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, provided that
the Income Fund, alone or together with another Income Fund, acquired a
controlling equity interest in such joint venture or tenancy in common and
possesses the power to direct or cause the direction of the management and
policies of such joint venture or tenancy in common. As of March 31, 1999, the
Income Funds held 51 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, the
General Partners or their affiliates are entitled to reimbursement, at cost,
for actual expenses incurred by them or their 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 generally 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
C-236
<PAGE>
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 nor 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 the limited partners or under arrangements that would make
them liable to creditors of an Income Fund. In general, the General Partners
have limited each Income Fund's outstanding indebtedness to 3.0% of the
aggregate adjusted tax basis of its restaurant properties and have endeavored
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, the General Partners or their affiliates are
entitled to reimbursement, at cost, for actual expenses incurred by them on
behalf of an Income Fund.
Sale of Restaurant Properties
The Income Funds generally hold their restaurant properties until the
General Partners 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, the intention has been 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, the General Partners have considered
factors such as potential capital appreciation, net cash flow and federal
income tax 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. See "Business of the Income Funds -- Description of Leases -- Right of
Lessee to Purchase," above. 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.
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<PAGE>
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 have been 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 interest 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 APF, as described above on page C-52.
C-238
<PAGE>
COMMON STOCK OWNERSHIP AFTER THE ACQUISITIONS
The following table presents certain information regarding beneficial
ownership of the APF Shares by the directors and executive officers of APF,
including the Principals, both as of , 1999, the record date for
determining the beneficial owners of APF Shares entitled to vote on the
approval of the Restated Articles, and on a pro forma basis. On the record
date, there were 37,348,464 APF Shares outstanding. The pro forma numbers are
based on the assumption that there will be 70,526,807 APF Shares outstanding
following the acquisitions if all of the Income Funds are acquired.
<TABLE>
<CAPTION>
Beneficial Ownership as Beneficial Ownership
of the Record Date Following the Acquisitions
--------------------------------- ------------------------------------
Name of Beneficial Owner Number Percent Number Percent(4)
- ------------------------ ------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
James M. Seneff, Jr..... 10,000 (1) * 3,790,746 (2) 5.4%
Robert A. Bourne........ -- * 1,057,182 1.5
G. Richard Hostetter.... 2,740 (3) * 2,740 *
Richard C. Huseman...... -- * -- *
J. Joseph Kruse......... -- * -- *
All directors and
executive officers as a
group (13 persons)(5).. 12,740 (1)(3) * 5,391,764 7.6
</TABLE>
- --------
* Less than 1%
(1) Represents shares held by the CNL Group, Inc., of which Mr. Seneff is a
principal stockholder.
(2) Includes 3,242,962 APF Shares held by the CNL Group, Inc., of which Mr.
Seneff is a principal stockholder.
(3) Represents shares held by SunTrust Bank of Chattanooga, on behalf of Mr.
Hostetter, in an individual retirement account.
(4) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For each beneficial owner, APF Shares
subject to options or conversion rights exercisable within 60 days of
, 1999 are deemed outstanding.
(5) It is expected that following the CNL Restaurant Business acquisitions, the
number of executive officers of APF will increase such that the group of
directors and executive officers of APF will consist of 13 persons. Based
on 70,526,807 APF Shares outstanding upon completion of the acquisitions,
those 13 persons would beneficially own 5,391,764 APF Shares, representing
7.6% of the then outstanding APF Shares. The number and percentage of APF
Shares that will be beneficially owned by the 13 persons who currently are
the directors and executive officers of APF is greater than the number and
percentage of APF Shares that will be beneficially owned by the directors
and executive officers of APF following the acquisitions due to changes in
the composition of the executive officers that are expected to occur in
connection with the CNL Restaurant Business acquisitions.
ADDITIONAL INFORMATION
APF stockholders who have more questions about the proposed acquisitions or
would like to request any additional information should contact D.F. King &
Co., Inc., the proxy solicitation firm hired by APF to assist in answering
stockholder questions and administering the Special Meeting at the following
address:
D. F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 207-3159
C-239
<PAGE>
Exhibit D-1
[LETTERHEAD OF MERRILL LYNCH]
February 10, 1999
Special Committee of the Board of Directors
CNL American Properties Fund, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Gentlemen:
CNL American Properties Fund, Inc., a Maryland corporation ("APF"), CFC
Acquisition Corp., a Maryland corporation and wholly-owned subsidiary of APF
("Acquisition 1"), CFS Acquisition Corp., a Maryland corporation and a wholly
owned subsidiary of APF ("Acquisition 2"), CNL Financial Corp., a Florida
corporation ("CNL Financial"), CNL Financial Services, Inc., a Florida
corporation ("CNL Services" and, together with CNL Financial, the "CNL
Financial Companies"), CNL Group, Inc., a Florida corporation ("CNL Group"),
and the principal stockholders of the CNL Financial Companies propose to enter
into an Agreement and Plan of Merger (the "Financial Companies Agreement")
pursuant to which the CNL Financial will be merged with Acquisition 1 and CNL
Services will be merged with Acquisition 2 (the "Financial Companies Mergers")
in a transaction in which the outstanding shares of common stock, par value
$1.00 per share, of CNL Financial and CNL Services will be converted into the
right to receive an aggregate of 4,700,000 shares of common stock, par value
$.01 per share, of APF (the "APF Shares"). In addition, APF, CFA Acquisition
Corp., a Maryland corporation and a wholly-owned subsidiary of APF
("Acquisition 3"), CNL Fund Advisors, Inc., a Florida corporation (the "CNL
Advisory Company" and, together with the CNL Financial Companies, the "CNL
Companies"), CNL Group and certain of the principal stockholders of the CNL
Advisory Company propose to enter into an Agreement and Plan of Merger (the
"Advisory Company Agreement" and, together with the Financial Companies
Agreement, the "Agreements") pursuant to which the CNL Advisory Company will be
merged with Acquisition 3 (the "Advisory Company Merger" and, together with the
Financial Companies Mergers, the "Mergers") in a transaction in which the
outstanding shares of the common stock, par value $1.00 per share, of the CNL
Advisory Company will be converted into the right to receive 7,600,000 APF
Shares (such shares, together with APF Shares to be issued in the Financial
Companies Mergers being referred to herein as the "Merger Consideration"). We
understand that the CNL Companies are affiliates of APF.
You have asked us whether, in our opinion, the Merger Consideration to be
issued in the Mergers, when viewed as a single transaction, is fair, from a
financial point of view, to APF.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed certain publicly available business and financial
information relating to the CNL Companies and APF that we deemed to be
relevant;
(2) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the CNL Companies and APF, as well as the amount and timing of
the cost savings and related expenses and synergies expected to result from
the Mergers (the "Expected Synergies"), furnished to us by the CNL
Companies and APF;
(3) conducted discussions with members of senior management and
representatives of the CNL Companies and APF concerning the matters
described in clauses (1) and (2) above, as well as their
D-1-1
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respective businesses and prospects before and after giving effect to the
Mergers and the Expected Synergies;
(4) reviewed valuation multiples for the common stock of the CNL
Companies and the APF Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant as well as
conducted a discounted cash flow analysis of the free cash flows of APF and
of the CNL Companies;
(5) reviewed the results of operations of the CNL Companies and APF and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) compared the proposed financial terms of the Mergers with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) participated in certain discussions among representatives of the CNL
Companies and APF and their financial and legal advisors;
(8) reviewed the potential pro forma impact of the Mergers;
(9) reviewed drafts of the Agreements; and
(10) reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have 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 Companies or APF or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct any physical inspection of the properties or facilities of the CNL
Companies or APF. With respect to the financial forecast information and the
Expected Synergies furnished to or discussed with us by the CNL Companies or
APF, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgment of the CNL Companies' or APF's
management as to the expected future financial performance of the CNL Companies
or APF, as the case may be, and the Expected Synergies. We have further assumed
that the Mergers will qualify as a tax-free reorganization for U.S. federal
income tax purposes. We have also assumed that the final form of each of the
Agreements will be substantially similar to the last draft of each such
Agreement reviewed by us. Our opinion is necessarily based upon market,
economic and other conditions as they exist and can be evaluated on, and on the
information made available to us as of, the date hereof. We have assumed that
in the course of obtaining the necessary consents or approvals (contractual or
otherwise) for the Mergers, no restrictions will be imposed that will have a
material adverse effect on the contemplated benefits of the Mergers. Our
opinion views the Mergers as a single transaction and does not cover either the
Financial Companies Mergers or the Advisory Company Merger as stand-alone
transactions.
We are acting as financial opinion provider to APF in connection with the
Mergers and, upon the rendering this opinion, will receive a fee from APF for
such services. We are also acting as financial opinion provider and rendering a
fairness opinion to APF in connection with certain other proposed mergers of up
to 18 limited partnerships affiliated with APF and the CNL Companies and will
receive a fee from APF for such services. In addition, APF has agreed to
indemnify us for certain liabilities arising out of these engagements.
We are currently engaged by APF to act as underwriter or placement agent in
connection with certain proposed equity financings for APF that may in the
future be undertaken by APF and, if we act in this capacity in connection with
such a financing, we will receive customary compensation for this service as
provided under the terms of such engagement. In addition, we were retained (i)
in June 1998 by APF to act as financial advisor in connection with the review
of certain strategic alternatives considered by APF and (ii) in July 1998 by
the CNL Financial Companies to act as financial advisor and lead placement
agent in connection with the structuring and issuance of certain franchise
loan-backed securities, and have received fees for the rendering of such
services. In addition, in the ordinary course of our business, we may in the
future actively trade APF
D-1-2
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Shares for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities. This opinion
is solely for the use and benefit of the Special Committee of the Board of
Directors of APF in its evaluation of the Mergers and shall not be used for
any other purpose. Our opinion does not address the merits of the underlying
decision by APF to engage in the Mergers. This opinion does not constitute a
recommendation to any shareholder of APF as to how such shareholder should
vote on any matter presented to such shareholder, including any vote with
respect to the authorization of additional shares for issuance by APF, and is
not intended to be relied upon or confer any rights or remedies upon any
employee, creditor, shareholder or other equity holder of APF or any other
party. This opinion shall not be reproduced, disseminated, quoted, summarized
or referred to at any time, in any manner or for any purpose, nor shall any
public references to Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") or any of its affiliates be made by APF or any of its
affiliates, without the prior written consent of Merrill Lynch. We are not
expressing any opinion herein as to the prices at which APF Shares may trade
following the announcement or consummation of the Mergers.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration to be issued in the Mergers,
when viewed together as a single transaction, is fair, from a financial point
of view, to APF.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
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Exhibit D-2
[LETTERHEAD OF MERRILL LYNCH]
February 10, 1999
Special Committee of the Board of Directors
CNL American Properties Fund, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Gentlemen:
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"), and Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (together with Messrs. Bourne and Seneff, the "General Partners"),
propose to enter into separate Agreements and Plans of Merger (collectively,
the "Agreements") with each of the 16 CNL Income Funds set forth on Schedule A
attached hereto (collectively, the "CNL Income Funds") pursuant to which the
CNL Income Funds will be merged with the Operating Partnership (collectively,
the "Mergers") in a transaction in which the outstanding general and limited
partner interests in the CNL Income Funds (the "Units") will be converted into
the right to receive a maximum of 54,700,000 shares of common stock, par value
$.01 per share, of APF (the "APF Shares") or, at the option of any holder of
limited partner interests who qualifies as a dissenting partner, a combination
of cash and Callable Notes of APF (together with the APF Shares, the "Merger
Consideration") in lieu of such APF Shares. For purposes of our opinion, we
have assumed that all Units will be converted into the right to receive APF
Shares. We understand that the CNL Income Funds are affiliates of APF.
You have asked us whether, in our opinion, the Merger Consideration to be
issued in the Mergers, when viewed as a single transaction, is fair, from a
financial point of view, to APF.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed certain publicly available business and financial
information relating to the CNL Income Funds and APF that we deemed to be
relevant;
(2) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the CNL 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 Mergers (the "Expected Synergies"), furnished to us by APF and the
General Partners regarding the CNL Income Funds;
(3) reviewed and analyzed the appraisals of the CNL Income Funds
prepared by Valuation Associates, an independent real estate appraisal
firm, as well as conducted an independent summary valuation analysis of the
CNL Income Funds' real estate assets;
(4) conducted discussions with members of senior management and
representatives of the CNL Income Funds, the General Partners and APF
concerning the matters described in clauses (1) and (2) above, as well as
their respective businesses and prospects before and after giving effect to
the Mergers and the Expected Synergies;
(5) reviewed valuation multiples for the APF Shares and compared them
with those of certain publicly traded companies that we deemed to be
relevant as well as conducted a discounted cash flow analysis of the free
cash flows of APF and of the CNL Income Funds' real estate assets.
D-2-1
<PAGE>
(6) reviewed the results of operations of the CNL Income Funds and APF
and compared them with those of certain other comparable entities that we
deemed to be relevant;
(7) compared the proposed financial terms of the Mergers with the
financial terms of certain other transactions that we deemed to be
relevant;
(8) participated in certain discussions among representatives of the CNL
Income Funds, the General Partners and APF and their financial and legal
advisors;
(9) reviewed the potential pro forma impact of the Mergers;
(10) reviewed drafts of the Agreements; and
(11) reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of APF or an appraisal of any of the assets or liabilities of the
CNL Income Funds. In addition, we have not assumed any obligation to conduct
any physical inspection of the properties or facilities of the CNL Income Funds
or APF. With respect to the financial forecast information and the Expected
Synergies furnished to or discussed with us by the CNL Income Funds or APF, we
have assumed that they have been reasonably prepared and reflect the best
currently available estimates and judgment of the General Partners' or APF's
management as to the expected future financial performance of the CNL Income
Funds or APF, as the case may be, and the Expected Synergies. We also have not
assumed any obligation to review the income tax consequences of the Mergers on
the CNL Income Funds or APF or their respective equity holders. We have also
assumed that the final form of each of the Agreements will be substantially
similar to the last draft of each such Agreement reviewed by us. Our opinion is
necessarily based upon market, economic and other conditions as they exist and
can be evaluated on, and on the information made available to us as of, the
date hereof. We have assumed that in the course of obtaining the necessary
consents or approvals (contractual or otherwise) for the Mergers, no
restrictions will be imposed that will have a material adverse effect on the
contemplated benefits of the Mergers. In addition, we have been advised by the
Special Committee, and have assumed for purposes of our opinion, that the
Mergers will occur at the same time. Our opinion views the Mergers as a single
transaction and does not cover any merger of a CNL Income Fund with the
Operating Partnership as a stand-alone transaction.
We are acting as financial opinion provider to APF in connection with the
Mergers and, upon the rendering this opinion, will receive a fee from APF for
such services. We are also acting as financial opinion provider to APF in
connection with certain other proposed mergers of three corporations affiliated
with APF and the CNL Income Funds and will receive a fee from APF for such
services. In addition, APF has agreed to indemnify us for certain liabilities
arising out of these engagements.
We are currently engaged by APF to act as underwriter or placement agent in
connection with certain proposed equity financings for APF that may in the
future be undertaken by APF and, if we act in this capacity in connection with
such a financing, we will receive customary compensation for this service as
provided under the terms of such engagement. In addition, we were retained (i)
in June 1998 by APF to act as financial advisor in connection with the review
of certain strategic alternatives considered by APF and (ii) in July 1998 by
the CNL Financial Corp. and CNL Financial Services, Inc. to act as financial
advisor and lead placement agent in connection with the structuring and
issuance of certain franchise loan-backed securities and have received fees for
the rendering of such services. In addition, in the ordinary course of our
business, we may in the future actively trade APF Shares for our own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities. This opinion is solely for the use and
benefit of the Special Committee of the Board of Directors of APF in its
evaluation of the Mergers and shall not be used for any other purpose. Our
opinion does not address the merits of the underlying decision by APF to engage
in the Mergers. This opinion does not constitute a recommendation to any
shareholder of APF as to how such
D-2-2
<PAGE>
shareholder should vote on any matter presented to such shareholder, including
any vote with respect to the authorization of additional shares for issuance
by APF, and is not intended to be relied upon or confer any rights or remedies
upon any employee, creditor, shareholder or other equity holder of APF or any
other party. This opinion shall not be reproduced, disseminated, quoted,
summarized or referred to at any time, in any manner or for any purpose, nor
shall any public references to Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") or any of its affiliates be made by APF or any
of its affiliates, without the prior written consent of Merrill Lynch. We are
not expressing any opinion herein as to the prices at which APF Shares may
trade following the announcement or consummation of the Mergers.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration to be issued in the Mergers,
when viewed together as a single transaction, is fair, from a financial point
of view, to APF.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
D-2-3
<PAGE>
Exhibit E
FORM OF FUND MERGER AGREEMENT
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"), , 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.
E-1
<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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<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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<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 fully paid and nonassessable APF Common Shares
( 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 $ , 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 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) 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 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.
E-29
<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 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.
E-30
<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.
E-31
<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.
E-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND , Ltd.
By: CNL Realty Corporation, as
General Partner
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
By: /s/ 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
E-33
<PAGE>
Exhibit F
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets--As of March 31, 1999 and December
31, 1998................................................................ F-2
Condensed Consolidated Statements of Earnings--For the Quarters ended
March 31, 1999 and 1998 ................................................ F-3
Condensed Consolidated Statements of Stockholders Equity--For the Quarter
ended March 31, 1999 and The Year Ended December 31, 1998............... F-4
Condensed Consolidated Statements of Cash Flows--For the Quarters ended
March 31, 1999 and 1998................................................. F-5
Notes to Condensed Consolidated Financial Statements--For the Quarters
ended March 31, 1999 and 1998........................................... F-6
Statement of Estimated Taxable Operating Results Before Dividends Paid
Deduction--Properties Acquired from January 1, 1998 through May 31,
1999....................................................................
Report of Independent 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>
March 31, 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................................ $475,787,661 $393,339,334
Net investment in direct financing leases.......... 123,270,117 91,675,650
Investment in joint venture........................ 1,083,564 988,078
Mortgage notes receivable.......................... 20,991,807 19,631,693
Equipment notes receivable......................... 20,277,933 19,377,380
Other investments.................................. 16,199,792 16,201,014
Cash and cash equivalents.......................... 35,796,119 123,199,837
Certificates of deposit............................ 2,007,278 2,007,540
Receivables, less allowance for doubtful accounts
of $1,125,411 and $1,069,024, respectively........ 548,862 526,650
Accrued rental income.............................. 5,007,334 3,959,913
Intangibles and other assets....................... 7,723,678 9,444,924
------------ ------------
$708,694,145 $680,352,013
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $ 34,150,000 $ 10,143,044
Accrued construction costs payable................. 10,172,169 4,170,410
Accounts payable and accrued expenses.............. 3,301,862 1,035,436
Due to related parties............................. 148,629 1,308,464
Rents paid in advance.............................. 1,340,636 954,271
Deferred rental income............................. 2,052,530 1,189,883
Other payables..................................... 162,328 458,402
------------ ------------
Total liabilities.............................. 51,328,154 19,259,910
------------ ------------
Minority interest.................................. 280,970 281,817
------------ ------------
Commitments (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.. 373,483 373,378
Capital in excess of par value................... 670,005,177 669,583,441
Accumulated distributions in excess of net
earnings........................................ (13,293,639) (9,546,531)
------------ ------------
Total stockholders' equity..................... 657,085,021 660,810,286
------------ ------------
$708,694,145 $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
March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Rental income from operating leases................. $ 9,754,802 $ 5,316,026
Earned income from direct financing leases.......... 2,429,206 1,362,672
Interest income from mortgage and equipment
notes receivable................................... 854,536 758,005
Investment and interest income...................... 1,357,347 880,759
Other income........................................ 2,880 10,342
----------- -----------
14,398,771 8,327,804
----------- -----------
Expenses:
General operating and administrative................ 1,048,600 552,327
Asset management fees to related party.............. 697,364 362,659
State and other taxes............................... 281,877 105,523
Depreciation and amortization....................... 1,556,181 779,498
Transaction costs................................... 125,926 --
----------- -----------
3,709,948 1,800,007
----------- -----------
Earnings Before Minority Interest in Income of
Consolidated Joint Venture, Equity in Earnings of
Unconsolidated Joint Venture and Provision for Loss
on Buildings......................................... 10,688,823 6,527,797
Minority Interest in Income of Consolidated
Joint Venture........................................ (7,763) (7,768)
Equity in Earnings of Unconsolidated Joint Venture.... 25,034 --
Provision for Losses on Buildings..................... (215,797) --
----------- -----------
Net Earnings.......................................... $10,490,297 $ 6,520,029
=========== ===========
Earnings Per Share of Common Stock
(Basic and Diluted).................................. $ .28 $ 0.33
=========== ===========
Weighted Average Number of Shares of Common Stock
Outstanding.......................................... 37,347,401 19,620,436
=========== ===========
</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
Quarter Ended March 31, 1999 and 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................... 18,096,485 $180,964 $323,706,927 $ (2,249,790) $321,638,101
Subscriptions received
for common stock
through public
offerings and
distribution
reinvestment plan..... 19,276,199 192,762 385,331,204 -- 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............. 10,537 105 210,630 -- 210,735
Stock issuance costs... -- -- (188,892) -- (188,892)
Net earnings........... -- -- -- 10,490,297 10,490,297
Distributions declared
and paid
($0.38 per share)..... -- -- -- (14,237,405) (14,237,405)
---------- -------- ------------ ------------ ------------
Balance at March 31,
1999................... 37,348,464 $373,483 $670,005,177 $(13,293,639) $657,085,021
========== ======== ============ ============ ============
</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>
Quarter Ended
March 31,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........ $ 13,605,256 $ 8,259,316
------------- ------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases......................................... (77,028,830) (14,814,884)
Investment in direct financing leases........... (29,608,346) (959,100)
Investment in joint venture..................... (117,662) --
Investment in mortgage notes receivable......... (1,388,463) --
Collection on mortgage notes receivable......... 75,010 72,547
Investment in equipment notes receivable........ (1,087,483) (703,600)
Collection on equipment notes receivable........ 239,596 327,329
Increase in other assets........................ -- (1,937,674)
------------- ------------
Net cash used in investing activities.......... (108,916,178) (18,015,382)
------------- ------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and stock issuance
costs paid by related parties on behalf of the
Company......................................... (1,142,237) (651,133)
Proceeds from borrowing on line of credit........ 36,587,245 239,986
Payment on line of credit........................ (12,580,289) --
Subscriptions received from stockholders......... 210,735 65,774,752
Distributions to minority interest............... (8,610) (8,481)
Distributions to stockholders.................... (14,237,405) (7,281,343)
Payment of stock issuance costs.................. (722,001) (6,142,369)
Other............................................ (200,234) (96,030)
------------- ------------
Net cash provided by financing activities...... 7,907,204 51,835,382
------------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... (87,403,718) 42,079,316
Cash and Cash Equivalents at Beginning of
Quarter.......................................... 123,199,837 47,586,777
------------- ------------
Cash and Cash Equivalents at End of Quarter....... $ 35,796,119 $ 89,666,093
============= ============
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............................... $ 237,843 $ 207,564
Stock issuance costs............................ 118,075 773,668
------------- ------------
$ 355,918 $ 981,232
============= ============
</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 Ended March 31, 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 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., CFA Acquisition Corp., CFC
Acquisition Corp., CFS Acquisition 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.
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 ended March 31, 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).
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. Public Offerings:
The Company's public offering of $345,000,000 of common stock (the "1998
Offering") became fully subscribed in December 1998. The Company closed the
1998 Offering upon receipt of the last subscription proceeds of $210,735 in
January 1999.
4. 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 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.
F-6
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Land............................................ $245,051,262 $210,451,742
Buildings....................................... 207,544,991 169,708,652
------------ ------------
452,596,253 380,160,394
Less accumulated depreciation................... (7,791,594) (6,242,782)
------------ ------------
444,804,659 373,917,612
Construction in progress........................ 31,810,333 20,033,256
------------ ------------
476,614,992 393,950,868
Less allowance for loss on land and buildings... (827,331) (611,534)
------------ ------------
$475,787,661 $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 quarters ended March 31, 1999 and 1998, the Company recognized
$1,230,845 and $756,198, respectively, of such rental income.
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. 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 the
estimated net realizable value for these Properties.
At March 31, 1999, the Company recorded provisions for losses on buildings
for the Boston Market Properties in Ellisville, Missouri and Cedar Park, Texas.
The provision for loss on building of $202,661 for the Ellisville Property
represents the difference between the Property's carrying value at March 31,
1999 and the net sales proceeds received in April 1999 from the sale of the
Property (See Note 14). The provision for loss on building of $13,136 for the
Cedar Park Property represents the difference between the Property's carrying
value at March 31, 1999 and the estimated net sales proceeds from the sale of
this Property based on a purchase and sales contract with a third party (See
Note 13).
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases at March 31, 1999:
<TABLE>
<S> <C>
1999............................................................ $ 28,216,275
2000............................................................ 37,821,458
2001............................................................ 38,064,729
2002............................................................ 38,898,763
2003............................................................ 40,154,728
Thereafter...................................................... 535,561,997
------------
$718,717,950
============
</TABLE>
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
F-7
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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).
6. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Minimum lease payments receivable............ $ 245,610,318 $ 186,515,403
Estimated residual values.................... 28,838,723 17,680,858
Interest receivable from Secured Equipment
Leases...................................... 88,509 81,690
Less unearned income......................... (151,267,433) (112,602,301)
------------- -------------
Net investment in direct financing leases.... $ 123,270,117 $ 91,675,650
============= =============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at March 31, 1999:
<TABLE>
<S> <C>
1999............................................................ $ 11,528,785
2000............................................................ 15,566,148
2001............................................................ 15,343,389
2002............................................................ 15,262,185
2003............................................................ 15,054,274
Thereafter...................................................... 172,855,537
------------
$245,610,318
============
</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 5).
7. Other Investments:
During the quarter ended March 31, 1999, the Company reassessed the
classification of the franchise loan certificates in a mortgage loan
securitization (the "Certificates") and transferred the Certificates from the
available for sale category to the held to maturity category. The fair value of
these Certificates represented the carrying value at the time of transfer
resulting in no unrealized gains or losses at the time of transfer. At March
31, 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. Interest on advances under the Credit Facility will be 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. The Company
F-8
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
obtained advances of $34,150,000 from the Credit Facility in March 1999. The
interest rate on the outstanding balance at March 31, 1999 was 6.69%. In
connection with obtaining the new Credit Facility, the Company incurred a
commitment fee, legal fees and closing costs of $200,234. 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 maturity 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 March 22, 2002. The terms of the agreement for the new Credit
Facility include financial covenants which provide for the maintenance of
certain financial ratios. The Company was in compliance with such covenants as
of March 31, 1999.
As of March 31, 1999 and December 31, 1998, $34,150,000 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 March 31, 1999 and December 31, 1998 approximated
fair value.
Interest costs (including amortization of loan costs) incurred for the
quarters ended March 31, 1999 and 1998 were $210,376 and $63,346, respectively,
all of which were capitalized as part of the cost of buildings under
construction. For the quarters ended March 31, 1999 and 1998, the Company paid
interest of $244,744 and $51,206, respectively.
9. Distributions:
For the quarters ended March 31, 1999 and 1998, approximately 82 and 87
percent, respectively, of the distributions paid to stockholders were
considered ordinary income and approximately 18 and 13 percent, respectively,
were considered a return of capital to stockholders for federal income tax
purposes. No amounts distributed to the stockholders for the quarters ended
March 31, 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 quarter ended March 31, 1999 may not be indicative of the
results that may be expected for the year ending December 31, 1999.
10. Related Party Transactions:
During the quarters ended March 31, 1999 and March 31, 1998, the Company
incurred $15,805 and $4,933,106, respectively, in selling commissions due to
CNL Securities Corp. for services in connection with the offering of shares. A
substantial portion of these amounts ($14,746 and $4,616,072) were paid by CNL
Securities Corp. as commissions to other broker-dealers during the quarters
ended March 31, 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 quarters ended March 31, 1999 and March 31, 1998, the
Company incurred $1,054 and $328,874, 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 the Company will also
pay the Advisor an acquisition fee equal to 4.5% of the purchase price paid by
the Company. During the quarters ended March 31, 1999 and March 31, 1998, the
Company incurred $9,483 and $2,959,864, respectively, of such fees. Such fees
are included in land and buildings on
F-9
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 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 quarters ended
March 31, 1999 and 1998, the Company incurred $14,678 and $60,869,
respectively, of such fees relating to four and three 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
quarter ended March 31, 1999, the Company incurred $495,440 of such fees
relating to 23 Properties. No such fees were incurred for the quarter ended
March 31, 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 price of the
equipment that is the subject of each Secured Equipment Lease. During the
quarters ended March 31, 1999 and 1998, the Company incurred $26,127 and
$4,471, 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 quarters ended March 31, 1999 and 1998, the Company
incurred $762,592 and $365,674, respectively, of such fees, of which $65,228
and $3,015, 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 March
31, 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 March 31,
1999, no such payments had been made to the Advisor.
F-10
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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. The expenses incurred for these services were
classified as follows for the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Stock issuance costs...................................... $ 51,644 $718,948
General operating and administrative expenses............. 365,198 262,894
-------- --------
$416,842 $981,842
======== ========
</TABLE>
During the quarter ended March 31, 1999, the Company acquired 38 Properties
for approximately $36,800,000 from Commercial Net Lease Realty, Inc. James M.
Seneff, Jr. is Chairman of the Board of Directors, Chief Executive Officer and
a director of both the Company and Commercial Net Lease Realty, Inc. Robert A.
Bourne is Vice Chairman of the Board of Directors and a director of both the
Company and Commercial Net Lease Realty, Inc. This transaction was approved by
the independent directors.
The due to related parties consisted of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Due to the Advisor:
Expenditures incurred on behalf of the Company and
accounting and administrative services........... $138,349 $1,238,148
Acquisition fees.................................. -- 39,788
-------- ----------
138,349 1,277,936
-------- ----------
Due to CNL Securities Corp:
Commissions....................................... 6,854 30,528
Marketing support and due diligence expense
reimbursement fees............................... 3,426 --
-------- ----------
10,280 30,528
-------- ----------
$148,629 $1,308,464
======== ==========
</TABLE>
11. 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 quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
S & A Properties Corporation............................ $1,765,881 $ N/A
DenAmerica Corporation.................................. N/A 892,499
Foodmaker, Inc.......................................... N/A 856,106
Houlihan's Restaurants, Inc. ........................... N/A 825,496
</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
F-11
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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.
12. Merger Transactions:
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 "Income Funds"). In connection therewith, the
Company has agreed to issue 7.6 million, 4.7 million and up to 61 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 such Income Fund.
On May 5, 1999, four limited partners in several Income Funds filed a
lawsuit against the general partners of the Income Funds and the Company in
connection with the proposed merger of the Income Funds. Additionally, on June
, 1999, a limited partner of the CNL Income Funds filed a lawsuit against the
Company and the Income Funds in connection with the proposed merger. The
Company and the general partners of the Income Funds believe that the lawsuits
are without merit and intend to defend vigorously against the claims. Because
the lawsuits were so recently filed, it is premature to further comment on the
lawsuits at this time.
13. Commitments:
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 $74,849,000, of which approximately $58,907,000 in
land and other costs had been incurred as of March 31, 1999. The buildings
currently under construction or renovation are expected to be operational by
September 1999. In connection with the purchase of each Property, the Company,
as lessor, entered into a long-term lease agreement.
The Company entered into two agreements with third parties to sell a Boston
Market Property in Ellisville, Missouri and a Boston Market Property in Cedar
Park, Texas. At March 31, 1999, the Company established provisions for losses
on buildings relating to the anticipated sale of both Properties (see Note 5).
The Company sold the Property in Ellisville, Missouri in April 1999 (see Note
14). As of May 5, 1999, the sale of the Property in Cedar Park, Texas had not
occurred.
14. Subsequent Events:
On each of April 1, 1999 and May 1, 1999, the Company declared distributions
of $4,746,243, or $.12708 per share of common stock, payable in June 1999 to
stockholders of record on April 1, 1999 and May 1, 1999, respectively.
During the period April 1, 1999 through May 5, 1999, the Company obtained
additional advances under its Credit Facility and acquired 34 Properties (eight
of which are under construction) for cash at a total cost of approximately
$61,800,000. In connection with the purchase of each of the 34 Properties, the
Company, as
F-12
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
lessor, entered into a long-term lease agreement. The buildings under
construction are expected to be operational by October 1999. In connection with
the eight Properties which are under construction, the Company has committed to
pay an additional $6,400,000 in construction and development costs.
In April 1999, the Company sold its Property in Ellisville, Missouri, for
$840,000 and received net sales proceeds of $816,957, resulting in a loss of
$202,661 for financial reporting purposes which the Company recorded at March
31, 1999 (See Note 5).
15. Reverse Stock Split:
On May 27, 1999, the shareholders approved a one-for-two reverse stock 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. All share and per share amounts have been restated herein to
reflect the one-for-two reverse stock split.
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 MAY 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 May
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 1/1/98-5/31/99 Acquisitions at 5/31/99(5)
--------------------- --------------------------
<S> <C> <C>
Estimated Taxable
Operating Results Before
Dividends Paid
Deduction:
Base Rent(1)........... $25,759,155 $1,483,922
Asset Management
Fees(2)............... (1,554,978) (94,407)
General and
Administrative
Expenses(3)........... (1,597,068) (92,003)
----------- ----------
Estimated Cash
Available from
Operations.......... 22,607,109 1,297,512
Depreciation
Expense(4)(6)........... (4,432,282) (201,724)
----------- ----------
Estimated Taxable
Operating Results
Before Dividends
Paid Deduction...... $18,174,827 1,095,788
=========== ==========
</TABLE>
- --------
(1) Base rent does not include percentage rents which become due if specified
levels of gross receipts are achieved.
(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 Asset Value as of the end of the preceding month as defined in
such agreement.
(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.
(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 May 31, 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 ($1.42 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 ($1.48 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
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 CCC a line of
credit in an amount not to exceed $250,000.
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
$1,300,000.
F-63
<PAGE>
CNL FINANCIAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-65
Financial Statements
Balance Sheets--As of December 31, 1998, June 30, 1997 and 1998......... F-66
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-67
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-68
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-69
Notes to Financial Statements--December 31, 1998, June 30, 1997 and
1998................................................................... F-70
</TABLE>
F-64
<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
F-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-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
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-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
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-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 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-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
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 Credit Corporation (CCC), a related party under common
control, under a loan agreement between CCC and a bank, of up to $2,500,000.
F-75
<PAGE>
CNL INCOME FUND, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-77
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998.................................................................... F-78
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-79
Condensed Statements of Cash Flows for the Quarters Ended September 30,
1999 and 1998........................................................... F-80
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-81
Report of Independent Accountants........................................ F-82
Balance Sheets as of December 31, 1998 and 1997.......................... F-83
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-84
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-85
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-86
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-87
</TABLE>
F-76
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,328,432 and
$2,277,627........................................... $7,523,383 $7,574,188
Investment in joint ventures.......................... 836,967 841,379
Cash and cash equivalents............................. 229,785 252,521
Receivables, less allowance for doubtful accounts of
$12,525 in 1999...................................... 7,883 30,959
Prepaid expenses...................................... 4,490 5,463
Lease costs, less accumulated amortization of $25,000
and $24,375.......................................... 25,000 25,625
Accrued rental income................................. 29,747 30,791
---------- ----------
$8,657,255 $8,760,926
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 32,994 $ 736
Accrued and escrowed real estate taxes payable........ 3,207 1,024
Distributions payable................................. 266,982 266,982
Due to related parties................................ 126,196 129,060
Rents paid in advance and deposits.................... 21,930 36,105
---------- ----------
Total liabilities................................... 451,309 433,907
Partners' capital..................................... 8,205,946 8,327,019
---------- ----------
$8,657,255 $8,760,926
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-77
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Rental income from operating leases....................... $233,666 $273,609
Interest and other income................................. 1,598 3,129
-------- --------
235,264 276,738
-------- --------
Expenses:
General operating and administrative...................... 21,676 22,148
Professional services..................................... 2,265 2,785
Real estate taxes......................................... 1,091 1,081
State and other taxes..................................... 5,667 4,407
Depreciation and amortization............................. 51,430 53,651
Transaction costs......................................... 31,116 --
-------- --------
113,245 84,072
-------- --------
Income Before Equity in Earnings of Joint Ventures.......... 122,019 192,666
Equity in Earnings of Joint Ventures........................ 23,890 20,873
-------- --------
Net Income.................................................. $145,909 $213,539
======== ========
Allocation of Net Income:
General partners.......................................... $ 1,459 $ 2,135
Limited partners.......................................... 144,450 211,404
-------- --------
$145,909 $213,539
======== ========
Net Income Per Limited Partner Unit......................... $ 4.82 $ 7.05
======== ========
Weighted Average Number of Limited Partner Units
Outstanding................................................ 30,000 30,000
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-78
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 330,430 $ 321,759
Net income........................................ 1,459 8,671
---------- -----------
331,889 330,430
---------- -----------
Limited partners:
Beginning balance................................. 7,996,589 8,707,291
Net income........................................ 144,450 992,766
Distributions ($8.90 and $56.78 per limited
partner unit, respectively)...................... (266,982) (1,703,468)
---------- -----------
7,874,057 7,996,589
---------- -----------
Total partners' capital......................... $8,205,946 $ 8,327,019
========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-79
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities................. $244,246 $290,063
-------- --------
Cash Flows from Investing Activities:
Decrease in restricted cash............................... -- 126,009
-------- --------
Net cash provided by investing activities................. -- 126,009
-------- --------
Cash Flows from Financing Activities:
Distributions to limited partners......................... (266,982) (316,221)
-------- --------
Net cash used in financing activities................... (266,982) (316,221)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ (22,736) 99,851
Cash and Cash Equivalents at Beginning of Quarter........... 252,521 184,130
-------- --------
Cash and Cash Equivalents at End of Quarter................. $229,785 $283,981
======== ========
Supplemental Schedule of Non-Cash Financing Activities:
Distributions declared and unpaid at end of quarter....... $266,982 $316,221
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-80
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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. 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 1,157,759 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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuits at
this time.
3. 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 2 being adjusted to 578,880 shares valued at $20.00 per APF
share.
F-81
<PAGE>
Report of Independent 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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<PAGE>
CNL INCOME FUND II, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-96
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-97
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-98
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-99
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-100
Report of Independent Accountants....................................... F-102
Balance Sheets as of December 31, 1998 and 1997......................... F-103
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-104
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-105
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-106
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-107
</TABLE>
F-95
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,651,736 and
$3,631,359.......................................... $12,266,850 $12,835,304
Investment in joint ventures......................... 4,342,183 4,353,427
Mortgage note receivable............................. -- 6,872
Cash and cash equivalents............................ 899,137 889,891
Restricted cash...................................... 678,175 --
Receivables, less allowance for doubtful accounts of
$68,675 and $55,435................................. 61,742 122,560
Prepaid expenses..................................... 7,789 4,801
Lease costs, less accumulated amortization of $15,621
and $14,889......................................... 4,942 5,674
Accrued rental income................................ 179,999 174,382
----------- -----------
$18,440,817 $18,392,911
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................... $ 33,821 $ 4,621
Escrowed real estate taxes payable................... 10,191 8,065
Distributions payable................................ 515,629 515,629
Due to related parties............................... 169,101 183,303
Rents paid in advance and deposits................... 23,200 40,412
----------- -----------
Total liabilities................................ 751,942 752,030
Partners' capital.................................... 17,688,875 17,640,881
----------- -----------
$18,440,817 $18,392,911
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-96
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Rental income from operating leases....................... $420,201 $432,820
Interest and other income................................. 13,671 22,954
-------- --------
433,872 455,774
-------- --------
Expenses:
General operating and administrative...................... 35,824 29,926
Professional services..................................... 3,517 5,716
State and other taxes..................................... 15,526 14,565
Depreciation and amortization............................. 83,049 83,312
Transaction costs......................................... 32,324 --
-------- --------
170,240 133,519
-------- --------
Income Before Equity in Earnings of Joint Ventures, Gain on
Sale of Land and Building, and Real Estate Disposition
Fees....................................................... 263,632 322,255
Equity in Earnings of Joint Ventures........................ 107,239 109,416
Gain on Sale of Land and Building........................... 192,752 --
Real Estate Disposition Fees................................ -- (45,150)
-------- --------
Net Income.................................................. $563,623 $386,521
======== ========
Allocation of Net Income:
General partners.......................................... $ 4,328 $ 4,317
Limited partners.......................................... 559,295 382,204
-------- --------
$563,623 $386,521
======== ========
Net Income Per Limited Partner Unit......................... $ 11.19 $ 7.64
======== ========
Weighted Average Number of Limited Partner Units
Outstanding................................................ 50,000 50,000
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-97
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 390,900 $ 373,111
Net income........................................ 4,328 17,789
----------- -----------
395,228 390,900
----------- -----------
Limited partners:
Beginning balance................................. 17,249,981 18,828,538
Net income........................................ 559,295 1,715,950
Distributions ($10.31 and $65.89 per limited
partner unit, respectively)...................... (515,629) (3,294,507)
----------- -----------
17,293,647 17,249,981
----------- -----------
Total partners' capital............................. $17,688,875 $17,640,881
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-98
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------------
1999 1998
--------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............. $ 518,058 $ 596,047
--------- ----------
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) 1,432,422
Collections on mortgage note receivable............. 6,817 --
--------- ----------
Net cash provided by investing activities......... 6,817 597,534
--------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................... (515,629) (594,000)
--------- ----------
Net cash used in financing activities............. (515,629) (594,000)
--------- ----------
Net Increase in Cash and Cash Equivalents............... 9,246 599,581
Cash and Cash Equivalents at Beginning of Quarter....... 889,891 470,194
--------- ----------
Cash and Cash Equivalents at End of Quarter............. $ 899,137 $1,069,775
========= ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of quarter............................. $ -- $ 45,150
========= ==========
Distributions declared and unpaid at end of quarter... $ 515,629 $1,747,628
========= ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-99
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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 March 31, 1999, the net sales proceeds of $677,678 from the sale of
the property in Columbia, Missouri, plus accrued interest of $497 were being
held in an interest-bearing escrow account pending the release of funds to
acquire an additional property.
4. Merger Transaction:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,393,267 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 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 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
F-100
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuits at
this time.
5. Concentration of Credit Risk:
The following schedule presents total rental and mortgage interest 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 properties held as tenants-in-common with
affiliates) for each of the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Golden Corral Corporation.................................. $107,153 $91,728
Restaurant Management Services, Inc. ...................... 57,110 57,110
</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 quarters
ended March 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Golden Corral Family Steakhouse Restaurants............... $107,153 $109,668
Popeyes Famous Fried Chicken Restaurants.................. 57,110 57,110
Wendy's Old Fashioned Hamburger Restaurants............... 54,948 56,273
</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 release the properties in a timely manner.
6. 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 4 being adjusted to 1,196,634 shares valued at $20.00 per
APF share.
F-101
<PAGE>
Report of Independent 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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<PAGE>
CNL INCOME FUND III, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-117
Condensed Statements of Income for the Quarters Ended March 31, 1999
and 1998............................................................... F-118
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-119
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-120
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-121
Report of Independent Accountants....................................... F-123
Balance Sheets as of December 31, 1998 and 1997......................... F-124
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-125
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-126
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-127
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-128
</TABLE>
F-116
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
March 31, 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,808,175 and
$2,738,895........................................... $11,676,552 $11,418,836
Net investment in direct financing leases, less
allowance for impairment in carrying value of
$25,821.............................................. 1,494,852 887,071
Investment in joint ventures.......................... 2,153,198 2,157,147
Cash and cash equivalents............................. 1,044,255 2,047,140
Receivables, less allowance for doubtful accounts of
$154,918 and $153,598................................ 64,657 89,519
Prepaid expenses...................................... 7,948 6,751
Accrued rental income, less allowance for doubtful
accounts of $41,380.................................. 75,172 65,914
Other assets.......................................... 29,354 29,354
----------- -----------
$16,545,988 $16,701,732
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 31,407 $ 2,072
Accrued and escrowed real estate taxes payable........ 14,463 15,217
Distributions payable................................. 500,000 500,000
Due to related party.................................. 141,182 152,887
Rents paid in advance................................. 20,982 25,579
----------- -----------
Total liabilities................................... 708,034 695,755
Minority interests.................................... 135,060 135,705
Partners' capital..................................... 15,702,894 15,870,272
----------- -----------
$16,545,988 $16,701,732
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-117
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Rental income from operating leases...................... $382,878 $421,125
Earned income from direct financing leases............... 43,968 33,866
Contingent rental income................................. 2,981 12,833
Interest and other income................................ 16,470 41,182
-------- --------
446,297 509,006
-------- --------
Expenses:
General operating and administrative..................... 34,722 31,780
Professional services.................................... 3,288 4,610
Real estate taxes........................................ -- 4,229
State and other taxes.................................... 12,617 11,516
Depreciation and amortization............................ 69,280 80,417
Transaction costs........................................ 30,882 --
-------- --------
150,789 132,552
-------- --------
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.......... 295,508 376,454
Minority Interest in Income of Consolidated Joint Venture.. (4,345) (4,345)
Equity in Earnings of Unconsolidated Joint Ventures........ 41,459 22,751
Gain on Sale of Land and Buildings......................... -- 583,373
-------- --------
Net Income................................................. $332,622 $978,233
======== ========
Allocation of Net Income:
General partners......................................... $ 3,326 $ 8,558
Limited partners......................................... 329,296 969,675
-------- --------
$332,622 $978,233
======== ========
Net Income Per Limited Partner Unit........................ $ 6.59 $ 19.39
======== ========
Weighted Average Number of Limited Partner Units
Outstanding............................................... 50,000 50,000
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-118
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Year Ended
Quarter Ended December
March 31, 31,
1999 1998
------------- -----------
<S> <C> <C>
General partners:
Beginning balance................................. $ 354,638 $ 339,611
Net income........................................ 3,326 15,027
----------- -----------
357,964 354,638
----------- -----------
Limited partners:
Beginning balance................................. 15,515,634 17,271,525
Net income........................................ 329,296 1,721,856
Distributions ($10.00 and $69.55 per limited
partner unit, respectively)...................... (500,000) (3,477,747)
----------- -----------
15,344,930 15,515,634
----------- -----------
Total partners' capital............................. $15,702,894 $15,870,272
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-119
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............ $ 442,021 $ 501,741
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings........... -- 2,424,977
Additions to land and building on operating lease.. (326,996) --
Investment in direct financing lease............... (612,920) --
Investment in joint venture........................ -- (415,586)
Collections on note receivable..................... -- 3,242
Decrease in restricted cash........................ -- 245,377
---------- ----------
Net cash provided by (used in) investing
activities...................................... (939,916) 2,258,010
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (500,000) (594,000)
Distributions to holders of minority interests..... (4,990) (5,050)
---------- ----------
Net cash used in financing activities............ (504,990) (599,050)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... (1,002,885) 2,160,701
Cash and Cash Equivalents at Beginning of Quarter...... 2,047,140 493,118
---------- ----------
Cash and Cash Equivalents at End of Quarter............ $1,044,255 $2,653,819
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of quarter............................ $ -- $ 53,400
========== ==========
Distributions declared and unpaid at end of quarter.. $ 500,000 $1,977,747
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-120
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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 the property in Hagerstown, Maryland, along with
amounts collected in 1998, under a promissory note in a Burger King property in
Montgomery, Alabama, at 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 capital lease.
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 2,082,901 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 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 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
F-121
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuits at
this time.
4. Subsequent Event:
In April 1999, the Partnership sold its property in Flagstaff, Arizona, to
the tenant for $1,103,127 and received net sales proceeds of $1,091,193,
resulting in a gain of $285,350 for financial reporting purposes.
5. 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 3 being adjusted to 1,041,451 shares valued at $20.00 per
APF share.
F-122
<PAGE>
Report of Independent 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-123
<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-124
<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-125
<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-126
<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-127
<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-128
<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-129
<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-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<PAGE>
CNL INCOME FUND IV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-140
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-141
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-142
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-143
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-144
Report of Independent Accountants....................................... F-146
Balance Sheets as of December 31, 1998 and 1997......................... F-147
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-148
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-149
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-150
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-151
</TABLE>
F-139
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
March 31, 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,845,981 and
$3,744,609........................................... $15,385,087 $15,486,459
Net investment in direct financing leases............. 1,221,384 1,231,482
Investment in joint ventures.......................... 3,388,240 2,862,906
Cash and cash equivalents............................. 689,011 739,382
Restricted cash....................................... -- 537,274
Receivables, less allowance for doubtful accounts of
$254,396 and $258,641................................ 36,107 24,676
Prepaid expenses...................................... 9,150 9,836
Lease costs, less accumulated amortization of $22,609
and $21,450.......................................... 32,535 18,094
Accrued rental income................................. 285,013 279,724
----------- -----------
$21,046,527 $21,189,833
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 35,965 $ 4,503
Accrued and escrowed real estate taxes payable........ 31,312 36,732
Distributions payable................................. 600,000 600,000
Due to related parties................................ 145,312 148,978
Rents paid in advance and deposits.................... 81,105 59,620
----------- -----------
Total liabilities................................... 893,694 849,833
Partners' capital..................................... 20,152,833 20,340,000
----------- -----------
$21,046,527 $21,189,833
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-140
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Rental income from operating leases....................... $496,533 $539,776
Earned income from direct financing leases................ 31,126 32,109
Contingent rental income.................................. 8,243 21,661
Interest and other income................................. 9,918 12,845
-------- --------
545,820 606,391
-------- --------
Expenses:
General operating and administrative...................... 40,438 34,625
Professional services..................................... 10,000 6,248
Real estate taxes......................................... 5,279 20,755
State and other taxes..................................... 15,395 15,641
Depreciation and amortization............................. 102,531 115,151
Transaction costs......................................... 33,018 --
-------- --------
206,661 192,420
-------- --------
Income Before Equity in Earnings of Joint Ventures and Gain
on Sale of Land and Buildings.............................. 339,159 413,971
Equity in Earnings of Joint Ventures........................ 73,674 42,174
Gain on Sale of Land and Buildings.......................... -- 120,915
-------- --------
Net Income.................................................. $412,833 $577,060
======== ========
Allocation of Net Income:
General partners.......................................... $ 4,128 $ 2,483
Limited partners.......................................... 408,705 574,577
-------- --------
$412,833 $577,060
======== ========
Net Income Per Limited Partner Unit......................... $ 6.81 $ 9.58
======== ========
Weighted Average Number of Limited Partner Units
Outstanding................................................ 60,000 60,000
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-141
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Year Ended
Ended December
March 31, 31,
1999 1998
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 769,078 $ 756,354
Net income......................................... 4,128 12,724
----------- -----------
773,206 769,078
----------- -----------
Limited partners:
Beginning balance.................................. 19,570,922 21,395,945
Net income......................................... 408,705 1,808,725
Distributions ($10.00 and $60.56 per limited
partner unit, respectively)....................... (600,000) (3,633,748)
----------- -----------
19,379,627 19,570,922
----------- -----------
Total partners' capital.......................... $20,152,833 $20,340,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-142
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------------
1999 1998
--------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............... $ 564,831 $ 586,084
--------- ----------
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..................... (600,000) (690,000)
--------- ----------
Net cash used in financing activities............. (600,000) (690,000)
--------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.... (50,371) 1,089,909
Cash and Cash Equivalents at Beginning of Quarter....... 739,382 876,452
--------- ----------
Cash and Cash Equivalents at End of Quarter............. $ 689,011 $1,966,361
========= ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of quarter............................. $ -- $ 45,663
========= ==========
Distributions declared and unpaid at end of quarter... $ 600,000 $1,833,748
========= ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-143
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................. $5,320,508 $4,406,943
Net investment in direct financing leases, less
allowance for impairment in carrying value......... 380,548 626,594
Cash................................................ 50,229 14,025
Receivables......................................... 7,930 10,943
Accrued rental income............................... 165,038 163,773
Other assets........................................ 2,514 2,513
Liabilities......................................... 50,816 27,211
Partners' capital................................... 5,875,951 5,197,580
Revenues............................................ 152,150 368,058
Provision for loss on land and buildings and net
investment in direct financing lease............... -- (441,364)
Net income.......................................... 111,787 (212,388)
</TABLE>
The Partnership recognized income totalling $73,674 and $42,174 for the
quarters ended March 31, 1999 and 1998, respectively, from these joint
ventures.
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
F-144
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
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 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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuits at
this time.
4. 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 3 being adjusted to 1,334,008 shares valued at $20.00 per
APF share.
F-145
<PAGE>
REPORT OF INDEPENDENT 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-146
<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-147
<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-148
<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-149
<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-150
<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-151
<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-152
<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-153
<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-154
<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-155
<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-156
<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-157
<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-158
<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-159
<PAGE>
CNL INCOME FUND V, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-161
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-162
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-163
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-164
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-165
Report of Independent Accountants....................................... F-168
Balance Sheets as of December 31, 1998 and 1997......................... F-169
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-170
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-171
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-172
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-173
</TABLE>
F-160
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,819,239 and $1,895,755
and allowance for loss on land and buildings of
$653,851 in 1999 and 1998............................ $ 9,695,760 $10,660,128
Net investment in direct financing leases............. 1,699,719 1,708,966
Investment in joint ventures.......................... 2,277,228 2,282,012
Mortgage notes receivable, less deferred gain......... 1,649,736 1,748,060
Cash and cash equivalents............................. 1,764,502 352,648
Receivables, less allowance for doubtful accounts of
$141,505 in 1999 and 1998............................ 29,299 87,490
Prepaid expenses...................................... 7,626 1,872
Accrued rental income................................. 254,992 239,963
Other assets.......................................... 54,346 54,346
----------- -----------
$17,433,208 $17,135,485
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 32,014 $ 7,546
Accrued and escrowed real estate taxes payable........ 12,903 10,361
Distributions payable................................. 500,000 500,000
Due to related parties................................ 268,812 228,448
Rents paid in advance................................. 37,775 6,112
----------- -----------
Total liabilities................................. 851,504 752,467
Commitment (Note 6)
Minority interest..................................... 151,531 155,916
Partners' capital..................................... 16,430,173 16,227,102
----------- -----------
$17,433,208 $17,135,485
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-161
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Rental income from operating leases....................... $284,961 $300,322
Earned income from direct financing leases................ 45,883 59,541
Contingent rental income.................................. 8,087 25,898
Interest and other income................................. 58,654 92,358
-------- --------
397,585 478,119
-------- --------
Expenses:
General operating and administrative...................... 36,114 38,554
Professional services..................................... 5,392 4,018
Real estate taxes......................................... 7,805 6,664
State and other taxes..................................... 5,957 7,747
Depreciation.............................................. 64,112 67,206
Transaction costs......................................... 31,470 --
-------- --------
150,850 124,189
======== ========
Income Before Minority Interest in Loss of Consolidated
Joint Venture, Equity in Earnings of Unconsolidated Joint
Ventures and Gain on Sale of Land and Buildings............ 246,735 353,930
Minority Interest in Loss of Consolidated Joint Venture..... 4,385 5,417
Equity in Earnings of Unconsolidated Joint Ventures......... 56,838 35,221
Gain on Sale of Land and Buildings.......................... 395,113 441,613
-------- --------
Net Income.................................................. $703,071 $836,181
======== ========
Allocation of Net Income:
General partners.......................................... $ 5,435 $ 7,089
Limited partners.......................................... 697,636 829,092
-------- --------
$703,071 $836,181
======== ========
Net Income Per Limited Partner Unit......................... $ 13.95 $ 16.58
======== ========
Weighted Average Number of Limited Partner Units Outstand-
ing........................................................ 50,000 50,000
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-162
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 503,730 $ 493,982
Net income........................................ 5,435 9,748
----------- -----------
509,165 503,730
----------- -----------
Limited partners:
Beginning balance................................. 15,723,372 18,026,552
Net income........................................ 697,636 1,535,147
Distributions ($10.00 and $76.77 per limited
partner unit, respectively)...................... (500,000) (3,838,327)
----------- -----------
15,921,008 15,723,372
----------- -----------
Total partners' capital............................. $16,430,173 $16,227,102
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-163
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............. $ 520,276 $ 460,505
---------- ----------
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)
Collections on mortgage note receivable.............. 277,819 4,788
---------- ----------
Net cash provided by investing activities........... 1,391,578 2,005,008
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................... (500,000) (575,000)
---------- ----------
Net cash used in financing activities............... (500,000) (575,000)
---------- ----------
Net Increase in Cash and Cash Equivalents.............. 1,411,854 1,890,513
Cash and Cash Equivalents at Beginning of Quarter...... 352,648 1,361,290
---------- ----------
Cash and Cash Equivalents at End of Quarter............ $1,764,502 $3,251,803
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of quarter............................. $ -- $ 65,400
========== ==========
Distributions declared and unpaid at end of quarter... $ 500,000 $2,338,327
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-164
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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 quarter ended March 31, 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.
3. 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 quarter ended
March 31, 1999, the borrower relating to the promissory note accepted in
connection with the sale of the property in St. Cloud, Florida, made an advance
payment of principal in the amount of $272,500 which was applied to the
outstanding principal balance relating to this promissory note. As a result of
the advance payment of principal, 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."
4. Merger Transaction:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,049,031 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 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
F-165
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuit at
this time.
5. 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 quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
------- ----
<S> <C> <C>
Golden Corral Corporation..................................... $48,878 N/A
Slaymaker Group, Inc.......................................... 46,131 N/A
</TABLE>
In addition, the following schedule presents total rental, earned, and
mortgage interest income from individual restaurant chains, each representing
more than ten percent of the Partnership's 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 quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Golden Corral.............................................. $48,878 $ N/A
Tony Roma's................................................ 46,131 N/A
Denny's.................................................... N/A 50,175
</TABLE>
The information denoted by N/A indicates that for the applicable period
presented, the tenant and the chain did not represent more than ten percent of
the Partnership's total rental, earned, and mortgage interest income.
F-166
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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.
6. Commitment:
During the quarter ended March 31, 1999, Halls Joint Venture (in which the
Partnership owns a 48.9% interest) entered into an agreement with the tenant to
sell the property owned by the joint venture. The general partners believe that
the anticipated sale price will exceed the net carrying value of the property.
As of May 13, 1999, the sale had not occurred.
7. Subsequent Event:
In April 1999, the Partnership collected the remaining outstanding balance
relating to the promissory note collateralized by the property in St. Cloud,
Florida (see Note 3).
8. 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 4 being adjusted to 1,024,516 shares valued at $20.00 per
APF share.
F-167
<PAGE>
Report of Independent 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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<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-179
<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-180
<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-181
<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-182
<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-183
<PAGE>
CNL INCOME FUND VI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-185
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-186
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-187
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-188
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-189
Report of Independent Accountants....................................... F-191
Balance Sheets as of December 31, 1998 and 1997......................... F-192
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-193
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-194
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-195
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-196
</TABLE>
F-184
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $3,699,926 and
$3,586,086........................................... $18,446,004 $18,559,844
Net investment in direct financing leases............. 3,913,621 3,929,152
Investment in joint ventures.......................... 5,064,213 5,021,121
Cash and cash equivalents............................. 1,158,507 1,170,686
Receivables, less allowance for doubtful accounts of
$322,603 and $323,813................................ 63,010 150,912
Prepaid expenses...................................... 8,422 949
Lease costs, less accumulated amortization of $7,594
and $7,181........................................... 10,106 10,519
Accrued rental income, less allowance for doubtful
accounts of $41,869 and $38,944...................... 809,258 785,982
Other assets.......................................... 26,731 26,731
----------- -----------
$29,499,872 $29,655,896
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable...................................... $ 38,776 $ 8,173
Accrued and escrowed real estate taxes payable........ 5,041 2,500
Due to related party.................................. 9,648 19,403
Distributions payable................................. 787,500 857,500
Rents paid in advance and deposits.................... 47,442 28,241
----------- -----------
Total liabilities................................. 888,407 915,817
Commitment (Note 3)
Minority interest..................................... 147,449 144,949
Partners' capital..................................... 28,464,016 28,595,130
----------- -----------
$29,499,872 $29,655,896
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-185
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------
1999 1998
-------- ----------
<S> <C> <C>
Revenues:
Rental income from operating leases..................... $600,737 $ 632,051
Earned income from direct financing leases.............. 112,080 124,209
Contingent rental income................................ 9,175 32,390
Interest and other income............................... 15,456 36,676
-------- ----------
737,448 825,326
-------- ----------
Expenses:
General operating and administrative.................... 40,783 45,465
Professional services................................... 4,710 5,870
State and other taxes................................... 9,466 9,905
Depreciation and amortization........................... 114,253 115,910
Transaction costs....................................... 33,125 --
-------- ----------
202,337 177,150
-------- ----------
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... 535,111 648,176
Minority Interest in Income of Consolidated Joint
Venture................................................. (2,500) (12,881)
Equity in Earnings of Unconsolidated Joint Ventures...... 123,775 56,496
Gain on Sale of Land and Buildings....................... -- 345,122
-------- ----------
Net Income............................................... $656,386 $1,036,913
======== ==========
Allocation of Net Income:
General partners........................................ $ 6,564 $ 8,488
Limited partners........................................ 649,822 1,028,425
-------- ----------
$656,386 $1,036,913
======== ==========
Net Income Per Limited Partner Unit...................... $ 9.28 $ 14.69
======== ==========
Weighted Average Number of Limited Partner Units
Outstanding............................................. 70,000 70,000
======== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-186
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 257,690 $ 229,363
Net income........................................ 6,564 28,327
----------- -----------
264,254 257,690
----------- -----------
Limited partners:
Beginning balance................................. 28,337,440 28,564,886
Net income........................................ 649,822 2,992,554
Distributions ($11.25 and $46.00 per limited
partner unit, respectively)...................... (787,500) (3,220,000)
----------- -----------
28,199,762 28,337,440
----------- -----------
Total partners' capital............................. $28,464,016 $28,595,130
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-187
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........... $ 960,251 $ 861,169
---------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings.......... -- 1,932,253
Additions to land and buildings on operating
leases........................................... -- (125,000)
Investment in joint ventures...................... (114,930) (1,253,755)
Decrease (Increase) in restricted cash............ -- (536,967)
---------- -----------
Net cash provided by (used in) investing
activities..................................... (114,930) 16,531
---------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (857,500) (787,500)
Distributions to holder of minority interest...... -- (9,801)
---------- -----------
Net cash used in financing activities........... (857,500) (797,301)
---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.. (12,179) 80,399
Cash and Cash Equivalents at Beginning of Quarter..... 1,170,686 1,614,759
---------- -----------
Cash and Cash Equivalents at End of Quarter........... $1,158,507 $ 1,695,158
========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
quarter............................................ $ 787,500 $ 787,500
========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-188
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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. 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 3,730,388 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 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 $36,721,726 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited
F-189
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
partner of the CNL Income Funds files a lawsuit against us and APF 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. Because the lawsuits were so recently filed, it is premature to further
comment on the lawsuit at this time.
3. Commitments:
During the quarter ended March 31, 1999, one of the Partnership's tenants
decided to exercise the option under its four lease agreements to purchase four
of the Partnership's Burger King properties. The general partners believe that
the anticipated sales price for each property exceeds the Partnership's net
carrying value attributable to each of the respective properties. As of May 13,
1999, the sales had not occurred.
4. 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 2 being adjusted to 1,865,194 shares valued at $20.00 per
APF share.
F-190
<PAGE>
Report of Independent 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-191
<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-192
<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-193
<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-194
<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-195
<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-196
<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-197
<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-198
<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-199
<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-200
<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-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 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-202
<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-203
<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-204
<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-205
<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-206
<PAGE>
CNL INCOME FUND VII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-208
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-209
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-210
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-211
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-212
Report of Independent Accountants....................................... F-214
Balance Sheets as of December 31, 1998 and 1997......................... F-215
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-216
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-217
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-218
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-219
</TABLE>
F-207
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December
1999 31, 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,550,015 and
$2,473,926........................................... $15,002,418 $15,078,507
Net investment in direct financing leases............. 3,343,366 3,365,392
Investment in joint ventures.......................... 3,307,204 3,327,934
Mortgage notes receivable, less deferred gain of
$125,005 and $125,278................................ 1,238,427 1,241,056
Cash and cash equivalents............................. 918,362 856,825
Receivables, less allowance for doubtful accounts of
$28,853 in 1999 and 1998............................. 4,628 78,478
Prepaid expenses...................................... 10,579 4,116
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1999 and 1998.................. 1,226,001 1,205,528
Other assets.......................................... 60,422 60,422
----------- -----------
$25,111,407 $25,218,258
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 32,996 $ 2,885
Escrowed real estate taxes payable.................... 6,941 5,834
Distributions payable................................. 675,000 675,000
Due to related parties................................ 15,710 25,111
Rents paid in advance and deposits.................... 53,205 49,027
----------- -----------
Total liabilities................................... 783,852 757,857
Commitments (Note 3)
Minority interest..................................... 146,344 146,605
Partners' capital..................................... 24,181,211 24,313,796
----------- -----------
$25,111,407 $25,218,258
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-208
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended March
31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Rental income from operating leases.................. $ 492,724 $ 492,724
Earned income from direct financing leases........... 101,876 104,375
Contingent rental income............................. 1,510 9,420
Interest and other income............................ 39,558 43,990
---------- ----------
635,668 650,509
---------- ----------
Expenses:
General operating and administrative................. 35,336 33,112
Professional services................................ 4,419 5,281
State and other taxes................................ 13,055 2,688
Depreciation......................................... 76,089 76,089
Transaction costs.................................... 33,273 --
---------- ----------
162,172 117,170
---------- ----------
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..................................... 473,496 533,339
Minority Interest in Income of Consolidated Joint
Venture............................................... (4,649) (4,660)
Equity in Earnings of Unconsolidated Joint Ventures.... 73,295 77,933
Gain on Sale of Land and Building...................... 273 247
---------- ----------
Net Income............................................. $ 542,415 $ 606,859
========== ==========
Allocation of Net Income:
General partners..................................... $ 5,424 $ 6,069
Limited partners..................................... 536,991 600,790
---------- ----------
$ 542,415 $ 606,859
========== ==========
Net Income Per Limited Partner Unit.................... $ 0.018 $ 0.020
========== ==========
Weighted Average Number of Limited Partner Units
Outstanding........................................... 30,000,000 30,000,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-209
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 205,744 $ 181,085
Net income........................................ 5,424 24,659
----------- -----------
211,168 205,744
----------- -----------
Limited partners:
Beginning balance................................. 24,108,052 24,366,693
Net income........................................ 536,991 2,441,359
Distributions ($0.023 and $0.090 per limited
partner unit, respectively)...................... (675,000) (2,700,000)
----------- -----------
23,970,043 24,108,052
----------- -----------
Total partners' capital............................. $24,181,211 $24,313,796
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-210
<PAGE>
CLN INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............... $ 738,569 $ 749,233
--------- ---------
Cash Flows from Investing Activities:
Collections on mortgage notes receivable.............. 2,878 2,600
Other................................................. -- 13,255
--------- ---------
Net cash provided by investing activities........... 2,878 15,855
--------- ---------
Cash Flows from Financing Activities:
Distributions to limited partners..................... (675,000) (675,000)
Distributions to holder of minority interest.......... (4,910) (4,818)
--------- ---------
Net cash used in financing activities............... (679,910) (679,818)
--------- ---------
Net Increase in Cash and Cash Equivalents................. 61,537 85,270
Cash and Cash Equivalents at Beginning of Quarter......... 856,825 761,317
--------- ---------
Cash and Cash Equivalents at End of Quarter............... $ 918,362 $ 846,587
========= =========
Supplemental Schedule of Non-Cash Financing Activities:
Distributions declared and unpaid at end of quarter... $ 675,000 $ 675,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-211
<PAGE>
CNL INCOME FUND VII, LTD.
(a Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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. 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 3,202,371 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 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 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.
F-212
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
On May 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuit at
this time.
3. Commitments:
During the quarter ended March 31, 1999, one of the Partnership's tenants
decided to exercise the option under its three lease agreements to purchase
three of the Partnership's Burger King properties (including one property owned
by a joint venture in which the Partnership owns a 51.1% interest). The general
partners believe that the anticipated sales price for each property exceeds the
Partnership's net carrying value attributable to each of the respective
properties. As of May 13, 1999, the sales had not occurred.
4. 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 2 being adjusted to 1,601,186 shares valued at $20.00 per
APF share.
F-213
<PAGE>
Report of Independent 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-214
<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-215
<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-216
<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-217
<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-218
<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-219
<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-220
<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-221
<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-222
<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-223
<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-224
<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-225
<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-226
<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-227
<PAGE>
CNL INCOME FUND VIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-229
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-230
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-231
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-232
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-233
Report of Independent Accountants....................................... F-235
Balance Sheets as of December 31, 1998 and 1997......................... F-236
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-237
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-238
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-239
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-240
</TABLE>
F-228
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,760,557 and
$1,685,510........................................... $15,694,231 $15,769,278
Net investment in direct financing leases............. 7,762,940 7,802,785
Investment in joint ventures.......................... 2,785,272 2,809,759
Mortgage notes receivable............................. 1,526,082 1,811,726
Cash and cash equivalents............................. 1,876,769 1,809,258
Receivables, less allowance for doubtful accounts of
$28,474 and $24,636.................................. 1,079 84,265
Prepaid expenses...................................... 11,337 3,959
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1999 and 1998.................. 1,950,689 1,927,418
Other assets.......................................... 52,671 52,671
----------- -----------
$31,661,070 $32,071,119
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 48,505 $ 4,258
Escrowed real estate taxes payable.................... 24,133 27,838
Distributions payable................................. 787,501 1,137,501
Due to related party.................................. 58,095 75,266
Rents paid in advance................................. 91,562 62,349
----------- -----------
Total liabilities................................... 1,009,796 1,307,212
Minority interest..................................... 108,625 108,600
Partners' capital..................................... 30,542,649 30,655,307
----------- -----------
$31,661,070 $32,071,119
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-229
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Rental income from operating leases.................. $ 492,989 $ 455,556
Earned income from direct financing leases........... 236,859 299,442
Contingent rental income............................. 3,279 18,486
Interest and other income............................ 54,365 65,084
---------- ----------
787,492 838,568
---------- ----------
Expenses:
General operating and administrative................. 37,649 32,443
Professional services................................ 5,732 5,506
State and other taxes................................ 17,534 5,269
Depreciation......................................... 75,047 52,242
Transaction costs.................................... 33,563 --
---------- ----------
169,525 95,460
---------- ----------
Income Before Minority Interest in Income of
Consolidated Joint Venture and Equity in Earnings of
Unconsolidated Joint Ventures......................... 617,967 743,108
Minority Interest in Income of Consolidated Joint
Venture............................................... (3,355) (3,404)
Equity in Earnings of Unconsolidated Joint Ventures.... 60,231 68,104
---------- ----------
Net Income............................................. $ 674,843 $ 807,808
========== ==========
Allocation of Net Income:
General partners..................................... $ 6,748 $ 8,078
Limited partners..................................... 668,095 799,730
---------- ----------
$ 674,843 $ 807,808
========== ==========
Net Income Per Limited Partner Unit.................... $ 0.019 $ 0.023
========== ==========
Weighted Average Number of Limited Partner Units
Outstanding........................................... 35,000,000 35,000,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-230
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 258,248 $ 226,441
Net income........................................ 6,748 31,807
----------- -----------
264,996 258,248
----------- -----------
Limited partners:
Beginning balance................................. 30,397,059 30,989,957
Net income........................................ 668,095 3,257,105
Distributions ($0.023 and $0.110 per limited
partner unit, respectively)...................... (787,501) (3,850,003)
----------- -----------
30,277,653 30,397,059
----------- -----------
Total partners' capital............................. $30,542,649 $30,655,307
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-231
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........ $ 924,814 $ 989,892
----------- ----------
Cash Flows from Investing Activities:
Collections on mortgage notes receivable........... 283,528 9,915
----------- ----------
Net cash provided by investing activities........ 283,528 9,915
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,137,501) (787,501)
Distributions to holder of minority interest....... (3,330) (3,350)
----------- ----------
Net cash used in financing activities............ (1,140,831) (790,851)
----------- ----------
Net Increase in Cash and Cash Equivalents............ 67,511 208,956
Cash and Cash Equivalents at Beginning of Quarter.... 1,809,258 1,602,236
----------- ----------
Cash and Cash Equivalents at End of Quarter.......... $ 1,876,769 $1,811,192
=========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
quarter........................................... $ 787,501 $1,137,500
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-232
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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 quarter
ended March 31, 1999, the borrower relating to the promissory note accepted in
connection with the sale of the property in Orlando, Florida made an advance
payment of principal in the amount of $272,500 which was applied to the
outstanding principal balance relating to this promissory note.
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 4,042,635 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 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 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
F-233
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, a limited partner of several Income Funds filed
a lawsuit against the general partner and APF 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.
Because the lawsuits were so recently filed, it is premature to further comment
on the lawsuits at this time.
4. 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 3 being adjusted to 2,021,318 shares valued at $20.00 per
APF share.
F-234
<PAGE>
Report of Independent 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-235
<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-236
<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-237
<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-238
<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-239
<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-240
<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-241
<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-242
<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-243
<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-244
<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-245
<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-246
<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-247
<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-248
<PAGE>
CNL INCOME FUND IX, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-250
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-251
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-252
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-253
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-254
Report of Independent Accountants....................................... F-256
Balance Sheets as of December 31, 1998 and 1997......................... F-257
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-258
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-259
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-260
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-261
</TABLE>
F-249
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,661,133 and $1,711,187
and allowance for loss on building of $249,368 for
1999 and 1998........................................ $14,933,928 $15,066,178
Net investment in direct financing leases, less
allowance for impairment in carrying value of $65,407
for 1998............................................. 5,366,053 5,905,995
Investment in joint ventures.......................... 6,421,708 6,473,381
Cash and cash equivalents............................. 2,044,011 1,287,379
Receivables, less allowance for doubtful accounts of
$208,186 and $206,052................................ 61,678 93,569
Prepaid expenses...................................... 20,404 3,185
Lease costs, less accumulated amortization of $1,952
and $1,577........................................... 13,048 13,423
Accrued rental income................................. 1,163,425 1,255,968
----------- -----------
$30,024,255 $30,099,078
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 31,318 $ 1,103
Accrued and escrowed real estate taxes payable........ 36,161 9,022
Distributions payable................................. 787,501 787,501
Due to related parties................................ 8,412 24,187
Rents paid in advance and deposits.................... 101,984 63,347
----------- -----------
Total liabilities................................... 965,376 885,160
Partners' capital..................................... 29,058,879 29,213,918
----------- -----------
$30,024,255 $30,099,078
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-250
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Rental income from operating leases..................... $ 418,795 $ 476,737
Earned income from direct financing leases.............. 173,188 210,157
Interest and other income............................... 23,251 11,621
--------- ---------
615,234 698,515
--------- ---------
Expenses:
General operating and administrative.................... 41,973 33,378
Professional services................................... 9,062 6,336
Real estate tax expense................................. 7,692 --
State and other taxes................................... 24,759 14,145
Depreciation and amortization........................... 75,910 63,245
Transaction costs....................................... 35,275 --
--------- ---------
194,671 117,104
--------- ---------
Income Before Equity in Earnings of Joint Ventures and
Gain on Sale of Land, Building, and Net Investment in
Direct Financing Lease................................... 420,563 581,411
Equity in Earnings of Joint Ventures...................... 135,902 127,808
Gain on Sale of Land, Building and Net Investment in
Direct Financing Lease................................... 75,997 --
--------- ---------
Net Income................................................ $ 632,462 $ 709,219
========= =========
Allocation of Net Income:
General partners........................................ $ 6,128 $ 7,092
Limited partners........................................ 626,334 702,127
--------- ---------
$ 632,462 $ 709,219
========= =========
Net Income Per Limited Partner Unit....................... $ 0.18 $ 0.20
========= =========
Weighted Average Number of Limited Partner Units
Outstanding.............................................. 3,500,000 3,500,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-251
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 214,763 $ 190,772
Net income........................................ 6,128 23,991
----------- -----------
220,891 214,763
----------- -----------
Limited partners:
Beginning balance................................. 28,999,155 29,956,452
Net income........................................ 626,334 2,262,707
Distributions ($0.23 and $0.92 per limited partner
unit, respectively).............................. (787,501) (3,220,004)
----------- -----------
28,837,988 28,999,155
----------- -----------
Total partners' capital............................. $29,058,879 $29,213,918
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-252
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 785,344 $ 804,054
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land, building and Net
investment in direct financing lease............. 2,400,000 --
Additions to land and building on operating
leases........................................... (1,641,211) --
----------- ----------
Net cash provided by investing activities....... 758,789 --
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (787,501) (787,501)
----------- ----------
Net cash used in financing activities........... (787,501) (787,501)
----------- ----------
Net Increase in Cash and Cash Equivalents............. 756,632 16,553
Cash and Cash Equivalents at Beginning of Quarter..... 1,287,379 1,250,388
----------- ----------
Cash and Cash Equivalents at End of Quarter........... $ 2,044,011 $1,266,941
=========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
quarter............................................ $ 787,501 $ 857,501
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-253
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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 for
impairment in carrying value of $65,407 relating to 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 $1,049,999
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. 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 3,700,097 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 three previous public
offerings, the most recent of which was completed in December 1998. In order to
assist the
F-254
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuit at
this time.
5. 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 4 being adjusted to 1,850,049 shares valued at $20.00 per
APF share.
F-255
<PAGE>
Report of Independent 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-256
<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-257
<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-258
<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-259
<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-260
<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-261
<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-262
<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-263
<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-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 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-265
<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-266
<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-267
<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-268
<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-269
<PAGE>
CNL INCOME FUND X, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-271
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-272
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-273
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-274
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-275
Report of Independent Accountants....................................... F-278
Balance Sheets as of December 31, 1998 and 1997......................... F-279
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-280
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-281
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-282
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-283
</TABLE>
F-270
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,402,126 and $1,329,832
and allowance for loss on land and building of
$908,518 in 1999 and 1998............................ $17,362,457 $16,685,182
Net investment in direct financing leases, less
allowance for impairment in carrying value of $93,328
in 1998.............................................. 10,092,876 10,713,000
Investment in joint ventures.......................... 4,196,724 3,421,329
Cash and cash equivalents............................. 1,225,257 1,835,972
Restricted cash....................................... -- 361,403
Receivables, less allowance for doubtful accounts of
$235,736 and $236,810................................ 35,646 81,100
Prepaid expenses...................................... 19,847 5,229
Accrued rental income, less allowance for doubtful
accounts of $275,520 and $269,421.................... 1,367,237 1,342,166
Other assets.......................................... 35,484 35,484
----------- -----------
$34,335,528 $34,480,865
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 49,902 $ 2,403
Accrued and escrowed real estate taxes payable........ 30,258 27,418
Distributions payable................................. 900,001 900,001
Due to related party.................................. 10,588 29,987
Rents paid in advance and deposits.................... 126,906 103,414
----------- -----------
Total liabilities................................... 1,117,655 1,063,223
Minority interest..................................... 64,446 64,745
Partners' capital..................................... 33,153,427 33,352,897
----------- -----------
$34,335,528 $34,480,865
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-271
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Rental income from operating leases.................... $ 448,457 $ 447,273
Earned income from direct financing leases............. 276,858 358,837
Interest and other income.............................. 13,714 26,472
--------- ---------
739,029 832,582
--------- ---------
Expenses:
General operating and administrative................... 50,482 38,237
Bad debt expense....................................... -- 2,033
Professional services.................................. 10,045 5,199
Real estate taxes...................................... 11,604 --
State and other taxes.................................. 14,577 10,271
Depreciation........................................... 72,294 58,198
Transaction costs...................................... 33,661 --
--------- ---------
192,663 113,938
--------- ---------
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.. 546,366 718,644
Minority Interest in Income of Consolidated Joint
Venture................................................. (1,879) (2,186)
Equity in Earnings of Unconsolidated Joint Ventures...... 81,404 63,134
Gain on Sale of Land and Buildings....................... 74,640 171,159
--------- ---------
Net Income............................................... $ 700,531 $ 950,751
========= =========
Allocation of Net Income:
General partners....................................... $ 6,261 $ 7,796
Limited partners....................................... 694,270 942,955
--------- ---------
$ 700,531 $ 950,751
========= =========
Net Income Per Limited Partner Unit...................... $ 0.17 $ 0.24
========= =========
Weighted Average Number of Limited Partner Units
Outstanding............................................. 4,000,000 4,000,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-272
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 229,725 $ 208,709
Net income........................................ 6,261 21,016
----------- -----------
235,986 229,725
----------- -----------
Limited partners:
Beginning balance................................. 33,123,172 34,945,334
Net income........................................ 694,270 1,857,842
Distributions ($0.23 and $0.92 per limited partner
unit, respectively).............................. (900,001) (3,680,004)
----------- -----------
32,917,441 33,123,172
----------- -----------
Total partners' capital............................. $33,153,427 $33,352,897
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-273
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 841,122 $ 1,003,374
----------- -----------
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 (1,230,672)
----------- -----------
Net cash provided by (used in) investing
activities.................................... (549,658) 434
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (900,001) (900,001)
Distributions to holder of minority interest..... (2,178) (2,196)
----------- -----------
Net cash used in financing activities.......... (902,179) (902,197)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (610,715) 101,611
Cash and Cash Equivalents at Beginning of Quarter.... 1,835,972 1,583,883
----------- -----------
Cash and Cash Equivalents at End of Quarter.......... $ 1,225,257 $ 1,685,494
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
quarter........................................... $ 900,001 $ 980,001
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-274
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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.
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. In March 1999, the Partnership reinvested the net
sales proceeds from the sale of the property in Amherst, New York, plus
additional funds, in a Golden Corral property in Fremont, Nebraska (see Note
3).
3. Net Investment in Direct Financing Leases:
At December 31, 1998, the Partnership had recorded an allowance for
impairment in carrying value of $93,328 relating to 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 and received net sales proceeds of $1,150,000
and recorded a gain of $74,640 for financial reporting purposes, resulting in a
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 hold one restaurant property. The Partnership
contributed approximately $802,400 to the joint venture and as of March 31,
1999, 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.
F-275
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $ 9,633,883 $ 9,340,944
Net investment in direct financing leases........ 1,465,599 657,426
Cash............................................. 9,741 2,935
Receivables...................................... 32 7,597
Prepaid expenses................................. 4,159 24,337
Accrued rental income............................ 28,010 19,880
Liabilities...................................... 2,473 3,119
Partners' capital................................ 11,138,951 10,050,000
Revenues......................................... 302,967 1,115,856
Net income....................................... 219,991 843,914
</TABLE>
The Partnership recognized income totalling $81,404 and $63,134 for the
quarters ended March 31, 1999 and 1998, respectively, from these joint
ventures.
5. 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 4,243,243 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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF in connection with the proposed
Merger.
F-276
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
The general partners and APF believe that the lawsuits are without merit and
intend to defend vigorously against the claims. Because the lawsuits were so
recently filed, it is premature to further comment on the lawsuit at this time.
6. 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 5 being adjusted to 2,121,622 shares valued at $20.00 per
APF share.
F-277
<PAGE>
Report of Independent 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-278
<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-279
<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-280
<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-281
<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-282
<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-283
<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-284
<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-285
<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-286
<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-287
<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-288
<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-289
<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-290
<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-291
<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-292
<PAGE>
CNL INCOME FUND XI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-294
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998.................................................................... F-295
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998 .......................... F-296
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-297
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998 .......................................................... F-298
Report of Independent Accountants........................................ F-300
Balance Sheets as of December 31, 1998 and 1997.......................... F-301
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-302
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-303
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-304
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-305
</TABLE>
F-293
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,696,431 and
$2,589,785.......................................... $21,914,945 $21,683,785
Net investment in direct financing leases............ 7,455,352 6,786,286
Investment in joint ventures......................... 2,759,981 2,521,613
Cash and cash equivalents............................ 1,872,630 1,559,240
Restricted cash...................................... -- 1,640,936
Receivables, less allowance for doubtful accounts of
$869 and $5,820..................................... 36,172 132,311
Prepaid expenses..................................... 13,454 12,335
Accrued rental income................................ 1,677,835 1,645,062
Other assets......................................... 122,024 122,024
----------- -----------
$35,852,393 $36,103,592
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................... $ 42,816 $ 14,461
Accrued and escrowed real estate taxes payable....... 16,436 15,138
Distributions payable................................ 875,006 995,006
Due to related party................................. 11,398 25,446
Rents paid in advance and deposits................... 90,907 92,069
----------- -----------
Total liabilities.................................. 1,036,563 1,142,120
Minority interest.................................... 503,903 503,860
Partners' capital.................................... 34,311,927 34,457,612
----------- -----------
$35,852,393 $36,103,592
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-294
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Rental income from operating leases.................... $ 643,500 $ 675,491
Earned income from direct financing leases............. 235,529 207,060
Contingent rental income............................... 20,242 19,768
Interest and other income.............................. 20,934 12,405
--------- ---------
920,205 914,724
--------- ---------
Expenses:
General operating and administrative................... 42,360 29,458
Professional services.................................. 10,838 4,952
Management fees to related party....................... 9,476 9,342
State and other taxes.................................. 28,189 23,334
Depreciation and amortization.......................... 106,646 114,665
Transaction costs...................................... 34,967 --
--------- ---------
232,476 181,751
--------- ---------
Income Before Minority Interests in Income of
Consolidated Joint Ventures and Equity in Earnings of
Unconsolidated Joint Ventures........................... 687,729 732,973
Minority Interests in Income of Consolidated Joint
Ventures................................................ (16,409) (17,018)
Equity in Earnings of Unconsolidated Joint Ventures...... 58,001 40,001
--------- ---------
Net Income............................................... $ 729,321 $ 755,956
========= =========
Allocation of Net Income:
General partners....................................... $ 7,293 $ 7,560
Limited partners....................................... 722,028 748,396
--------- ---------
$ 729,321 $ 755,956
========= =========
Net Income Per Limited Partner Unit...................... $ 0.18 $ 0.19
========= =========
Weighted Average Number of Limited Partner Units
Outstanding............................................. 4,000,000 4,000,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-295
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 211,047 $ 176,232
Net income........................................ 7,293 34,815
----------- -----------
218,340 211,047
----------- -----------
Limited partners:
Beginning balance................................. 34,246,565 34,132,000
Net income........................................ 722,028 3,774,589
Distributions ($0.22 and $0.92 per limited partner
unit, respectively).............................. (875,006) (3,660,024)
----------- -----------
34,093,587 34,246,565
----------- -----------
Total partners' capital............................. $34,311,927 $34,457,612
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-296
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........... $ 974,168 $1,024,997
----------- ----------
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 ventures...................... (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................. (995,006) (875,006)
Distributions to holders of minority interests.... (16,366) (19,126)
----------- ----------
Net cash used in financing activities........... (1,011,372) (894,132)
----------- ----------
Net Increase in Cash and Cash Equivalents............. 313,390 130,865
Cash and Cash Equivalents at Beginning of Quarter..... 1,559,240 1,272,386
----------- ----------
Cash and Cash Equivalents at End of Quarter........... $ 1,872,630 $1,403,251
=========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
quarter.......................................... $ 875,006 $ 915,006
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-297
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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 March 31, 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-298
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $3,660,771 $3,427,681
Net investment in direct financing lease.......... 323,424 --
Cash.............................................. 8,405 1,109
Prepaid expenses.................................. 3,230 8,290
Accrued rental income............................. 139,279 130,585
Liabilities....................................... 155 --
Partners' capital................................. 4,134,954 3,567,665
Revenues.......................................... 111,420 399,305
Net income........................................ 83,608 300,036
</TABLE>
The Partnership recognized income totalling $58,001 and $40,001 for the
quarters ended March 31, 1999 and 1998, respectively, from these joint
ventures.
4. Merger Transaction:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,394,196 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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuit at
this time.
5. 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 4 being adjusted to 2,197,098 shares valued at $20.00 per
APF share.
F-299
<PAGE>
Report of Independent 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
F-300
<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-301
<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-302
<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-303
<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-304
<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-305
<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-306
<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-307
<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-308
<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-309
<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-310
<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-311
<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-312
<PAGE>
CNL INCOME FUND XII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-314
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998..................................................................... F-315
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-316
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................. F-317
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998............................................................ F-318
Report of Independent Accountants........................................ F-320
Balance Sheets as of December 31, 1998 and 1997.......................... F-321
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-322
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-323
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-324
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-325
</TABLE>
F-313
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,879,307 and $1,795,099
and allowance for loss on building of $206,535 in
1999 and 1998........................................ $20,619,125 $20,703,333
Net investment in direct financing leases............. 12,425,957 12,471,978
Investment in joint ventures.......................... 2,652,267 2,522,004
Cash and cash equivalents............................. 2,000,725 2,362,980
Receivables, less allowance for doubtful accounts of
$3,990 and $214,633.................................. 43,584 16,862
Prepaid expenses...................................... 17,024 7,038
Lease costs, less accumulated amortization of $3,754
and $3,256........................................... 25,799 26,297
Accrued rental income, less allowance for doubtful
accounts
of $6,323 in 1999 and 1998........................... 2,574,477 2,524,406
----------- -----------
$40,358,958 $40,634,898
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 37,483 $ 21,195
Accrued and escrowed real estate taxes payable........ 17,146 10,137
Distributions payable................................. 956,252 1,091,252
Due to related party.................................. 11,351 24,025
Rents paid in advance and deposits.................... 39,624 97,448
----------- -----------
Total liabilities................................... 1,061,856 1,244,057
Commitment (Note 3)
Partners' capital..................................... 39,297,102 39,390,841
----------- -----------
$40,358,958 $40,634,898
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-314
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Rental income from operating leases................... $ 604,884 $ 626,546
Earned income from direct financing leases............ 376,334 407,674
Contingent rental income.............................. 2,371 7,422
Interest and other income............................. 19,755 15,252
---------- ----------
1,003,344 1,056,894
---------- ----------
Expenses:
General operating and administrative.................. 47,284 34,465
Professional services................................. 11,141 12,986
Bad debt expense...................................... -- 8,968
Management fees to related party...................... 10,530 10,580
Real estate taxes..................................... 2,125 --
State and other taxes................................. 20,764 17,248
Depreciation and amortization......................... 84,706 79,994
Transaction costs..................................... 35,419 --
---------- ----------
211,969 164,241
---------- ----------
Income Before Equity in Earnings of Joint Ventures...... 791,375 892,653
Equity in Earnings of Joint Ventures.................... 71,138 65,650
---------- ----------
Net Income.............................................. $ 862,513 $ 958,303
========== ==========
Allocation of Net Income:
General partners...................................... $ 8,625 $ 9,583
Limited partners...................................... 853,888 948,720
---------- ----------
$ 862,513 $ 958,303
========== ==========
Net Income Per Limited Partner Unit..................... $ 0.19 $ 0.21
========== ==========
Weighted Average Number of Limited Partner Units Out-
standing............................................... 4,500,000 4,500,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-315
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 223,305 $ 192,411
Net income........................................ 8,625 30,894
----------- -----------
231,930 223,305
----------- -----------
Limited partners:
Beginning balance................................. 39,167,536 40,224,901
Net income........................................ 853,888 2,902,643
Distributions ($0.21 and $0.88 per limited partner
unit, respectively).............................. (956,252) (3,960,008)
----------- -----------
39,065,172 39,167,536
----------- -----------
Total partners' capital......................... $39,297,102 $39,390,841
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-316
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents
Net Cash Provided by Operat-
ing Activities............. $ 853,445 $1,129,927
---------- ----------
Cash Flows from Investing
Activities:
Investment in joint ven-
ture..................... (124,448) --
Payment of lease costs.... -- (3,500)
---------- ----------
Net cash used in invest-
ing activities......... (124,448) (3,500)
---------- ----------
Cash Flows from Financing
Activities:
Distributions to limited
partners................. (1,091,252) (956,252)
---------- ----------
Net cash used in financ-
ing activities......... (1,091,252) (956,252)
---------- ----------
Net Increase (Decrease) in
Cash and Cash Equivalents.... (362,255) 170,175
Cash and Cash Equivalents at
Beginning of Quarter......... 2,362,980 1,706,415
---------- ----------
Cash and Cash Equivalents at
End of Quarter............... $2,000,725 $1,876,590
---------- ----------
Supplemental Schedule of Non-
Cash Financing Activities:
Distributions declared and
unpaid at end of quarter... $ 956,252 $ 956,252
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-317
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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. 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 4,768,496 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 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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuit at
this time.
F-318
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
3. Commitment:
In March 1999, the Partnership entered into an agreement with an unrelated
third party to sell the Long John Silver's property in Morganton, North
Carolina. The general partners believe that the anticipated sales price will
exceed the Partnership's cost attributable to the property; however, as of May
13, 1999, the sale had not occurred.
4. 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 2 being adjusted to 2,384,248 shares valued at $20.00 per
APF share.
F-319
<PAGE>
Report of Independent 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-320
<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-321
<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-322
<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-323
<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-324
<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-325
<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-326
<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-327
<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-328
<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-329
<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-330
<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-331
<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-332
<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-333
<PAGE>
CNL INCOME FUND XIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998..... F-332
Condensed Statements of Income for the Quarters Ended March 31, 1999
and 1998............................................................... F-333
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-334
Condensed Statements of Cash Flows for the Quarter Ended March 31, 1999
and 1998............................................................... F-335
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-336
Report of Independent Accountants....................................... F-339
Balance Sheets as of December 31, 1998 and 1997......................... F-340
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-341
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-342
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-343
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-344
</TABLE>
F-334
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,210,970 and $2,107,624
and allowance for loss on building of $297,885 in
1999 and 1998........................................ $22,842,012 $22,945,358
Net investment in direct financing leases............. 6,930,543 6,951,890
Investment in joint ventures.......................... 2,449,068 2,451,336
Cash and cash equivalents............................. 687,717 766,859
Receivables, less allowance for doubtful accounts of
$817 and $532........................................ 69,067 121,119
Prepaid expenses...................................... 24,630 8,453
Lease costs, less accumulated amortization of $436 in
1999................................................. 35,314 17,875
Accrued rental income................................. 1,480,032 1,424,603
----------- -----------
$34,518,383 $34,687,493
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 38,589 $ 4,068
Accrued and escrowed real estate taxes payable........ 13,197 6,923
Distributions payable................................. 850,002 850,002
Due to related party.................................. 20,964 22,529
Rents paid in advance and deposits.................... 28,227 54,568
----------- -----------
Total liabilities................................. 950,979 938,090
Commitment (Note 4)
Partners' capital..................................... 33,567,404 33,749,403
----------- -----------
$34,518,383 $34,687,493
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-335
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Rental income from operating leases..................... $ 596,445 $ 618,515
Earned income from direct financing leases.............. 192,950 217,035
Contingent rental income................................ 40,605 65,923
Interest and other income............................... 6,768 20,195
--------- ---------
836,768 921,668
--------- ---------
Expenses:
General operating and administrative.................... 41,519 30,094
Professional services................................... 12,039 8,405
Management fees to related party........................ 8,596 8,953
Real estate taxes....................................... 8,340 --
State and other taxes................................... 21,476 15,953
Depreciation and amortization........................... 103,841 98,418
Transaction costs....................................... 33,181 --
--------- ---------
228,992 161,823
--------- ---------
Income Before Equity in Earnings of Joint Ventures........ 607,776 759,845
Equity in Earnings of Joint Ventures...................... 60,227 64,307
--------- ---------
Net Income................................................ $ 668,003 $ 824,152
========= =========
Allocation of Net Income:
General partners........................................ $ 6,680 $ 8,242
Limited partners........................................ 661,323 815,910
--------- ---------
$ 668,003 $ 824,152
========= =========
Net Income Per Limited Partner Unit....................... $ 0.17 $ 0.20
========= =========
Weighted Average Number of Limited Partner Units Outstand-
ing...................................................... 4,000,000 4,000,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-336
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 163,874 $ 137,207
Net income........................................ 6,680 26,667
----------- -----------
170,554 163,874
----------- -----------
Limited partners:
Beginning balance................................. 33,585,529 34,516,349
Net income........................................ 661,323 2,469,188
Distributions ($0.21 and $0.85 per limited partner
unit, respectively).............................. (850,002) (3,400,008)
----------- -----------
33,396,850 33,585,529
----------- -----------
Total partners' capital............................. $33,567,404 $33,749,403
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-337
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
--------------------
1999 1998
-------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.............. $788,735 $ 989,648
-------- ----------
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.................... (850,002) (850,002)
-------- ----------
Net cash used in financing activities.............. (850,002) (850,002)
-------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents..... (79,142) 139,646
Cash and Cash Equivalents at Beginning of Quarter........ 766,859 907,980
-------- ----------
Cash and Cash Equivalents at End of Quarter.............. $687,717 $1,047,626
======== ==========
Supplemental Schedule of Non-Cash Financing Activities:
Distributions declared and unpaid at end of quarter.... $850,002 $ 850,002
======== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-338
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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. 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 of the general partners) for each of the
quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Flagstar Enterprises, Inc. (and Denny's Inc. and
Quincy's Inc. for the quarter ended March 31, 1998..... $162,021 $186,036
Golden Corral Corporation............................... 130,435 133,150
Foodmaker, Inc. ........................................ 113,223 113,418
Long John Silver's, Inc. ............................... 105,362 188,672
Checkers Drive-In Restaurants, Inc. .................... 91,622 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 and the properties
held as tenants-in-common with affiliates of the general partners) for each of
the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Hardee's.................................................. $162,021 $162,498
Golden Corral Family Steakhouse Restaurants............... 130,435 133,150
Jack in the Box........................................... 113,223 113,418
Long John Silver's........................................ 105,362 188,672
Burger King............................................... 100,140 120,595
Checkers Drive-In Restaurants............................. 91,622 N/A
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or 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 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-339
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 on the three rejected leases. During 1998,
the Partnership entered into new leases for two of the three properties with
new tenants, one for which rent commenced in December 1998 and one for which
rental income is expected to commence subsequent to March 31, 1999, pending
renovations to the property by the tenant. In addition, in May 1999, the
Partnership re-leased the remaining rejected lease property to a new tenant
(See Note 5). 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
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.
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 3,886,185 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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were recently filed, it is premature to further comment on the lawsuit at this
time.
4. 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 had been incurred as of March 31,
1999.
F-340
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
5. Subsequent Event:
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
$975,000 in renovation costs.
6. 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 3 being adjusted to 1,943,093 shares valued at $20.00 per
APF share.
F-341
<PAGE>
Report of Independent 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 March 31, 1999 and December 31, 1998..... F-358
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-359
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-360
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-361
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-362
Report of Independent 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 Partner's 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>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building............................................. $26,345,787 $26,509,264
Net investment in direct financing leases............. 7,276,175 7,300,102
Investment in joint ventures.......................... 3,863,338 3,813,175
Cash and cash equivalents............................. 763,678 949,056
Receivables, less allowance for doubtful accounts of
$1,105 in 1999 and 1998.............................. 36,238 62,824
Prepaid expenses...................................... 18,775 8,389
Lease costs, less accumulated amortization of $1,073
in 1999.............................................. 31,927 --
Accrued rental income, less allowance for doubtful
accounts of $12,622 in 1999 and 1998................. 1,987,635 1,895,349
----------- -----------
$40,323,553 $40,538,159
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 34,464 $ 2,577
Accrued and escrowed real estate taxes payable........ 10,703 18,198
Distributions payable................................. 928,130 928,130
Due to related party.................................. 24,708 25,432
Rents paid in advance and deposits.................... 66,659 88,098
----------- -----------
Total liabilities................................... 1,064,664 1,062,435
Commitment (Note 4)
Partners' capital..................................... 39,258,889 39,475,724
----------- -----------
$40,323,553 $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
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Rental income from operating leases................... $ 706,805 $ 717,277
Earned income from direct financing leases............ 199,166 242,219
Interest and other income............................. 10,520 20,979
---------- ----------
916,491 980,475
---------- ----------
Expenses:
General operating and administrative.................. 48,343 36,303
Professional services................................. 7,784 6,182
Management fees to related party...................... 9,544 9,506
Real estate taxes..................................... 4,874 3,450
State and other taxes................................. 30,354 20,996
Depreciation and amortization......................... 103,926 85,053
Transaction costs..................................... 33,175 --
---------- ----------
238,000 161,490
---------- ----------
Income Before Equity in Earnings of Joint Ventures, Gain
on Sale of Land, and Provision for Loss on Building.... 678,491 818,985
Equity in Earnings of Joint Ventures.................... 93,686 82,505
Gain on Sale of Land.................................... -- 70,798
Provision for Loss on Building.......................... (60,882) --
---------- ----------
Net Income.............................................. $ 711,295 $ 972,288
========== ==========
Allocation of Net Income:
General partners...................................... $ 7,468 $ 9,014
Limited partners...................................... 703,827 963,274
---------- ----------
$ 711,295 $ 972,288
========== ==========
Net Income Per Limited Partner Unit..................... $ 0.16 $ 0.21
========== ==========
Weighted Average Number of Limited Partner Units
Outstanding............................................ 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>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 177,733 $ 146,640
Net income........................................ 7,468 31,093
----------- -----------
185,201 177,733
----------- -----------
Limited partners:
Beginning balance................................. 39,297,991 39,842,517
Net income........................................ 703,827 3,167,994
Distributions ($0.21 and $0.83 per limited partner
unit, respectively).............................. (928,130) (3,712,520)
----------- -----------
39,073,688 39,297,991
----------- -----------
Total partners' capital......................... $39,258,889 $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>
Quarter Ended
March 31,
---------------------
1999 1998
--------- ----------
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents
Net Cash Provided by
Operating Activities....... $ 819,872 $1,050,016
--------- ----------
Cash Flows from Investing
Activities:
Proceeds from sale of land
and building............. -- 1,208,732
Investment in joint
ventures................. (44,120) (84,992)
Increase in restricted
cash..................... -- (1,208,732)
Payment of lease costs.... (33,000) --
--------- ----------
Net cash used in
investing activities... (77,120) (84,992)
--------- ----------
Cash Flows from Financing
Activities:
Distributions to limited
partners................. (928,130) (928,130)
--------- ----------
Net cash used in
financing activities... (928,130) (928,130)
--------- ----------
Net Increase (Decrease) in
Cash and Cash Equivalents.... (185,378) 36,894
Cash and Cash Equivalents at
Beginning of Quarter......... 949,056 1,285,777
--------- ----------
Cash and Cash Equivalents at
End of Quarter............... $ 763,678 $1,322,671
========= ==========
Supplemental Schedule of Non-
Cash Financing Activities:
Distributions declared and
unpaid at end of
quarter.................. $ 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 Ended March 31, 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 March 31, 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.
2. Land and Building on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land........................................... $16,195,936 $16,195,936
Buildings...................................... 12,024,577 12,024,577
----------- -----------
28,220,513 28,220,513
Less accumulated depreciation.................. (1,776,689) (1,674,094)
----------- -----------
26,443,824 26,546,419
Less allowance for loss on building............ (98,037) (37,155)
----------- -----------
$26,345,787 $26,509,264
=========== ===========
</TABLE>
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
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 represents the difference between the
carrying value of the property at December 31, 1998 and the estimated net
realizable value for the property.
In addition, at March 31, 1999, the Partnership recorded a provision for
loss on building in the amount of $60,882 for financial reporting purposes
relating to the Long John Silver's property in Stockbridge, Georgia. 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 March 31, 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. 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 4,313,041 shares of
its
F-362
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuit at
this time.
4. Commitment:
In February 1999, the Partnership entered into an agreement with an
unrelated third party to sell the Long John Silver's property in Stockbridge,
Georgia. At March 31, 1999, the Partnership established a provision for loss on
building related to the anticipated sale of this property (see Note 2). As of
May 13, 1999, the sale had not occurred.
5. 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 3 being adjusted to 2,156,521 shares valued at $20.00 per
APF share.
F-363
<PAGE>
Report of Independent 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 March 31, 1999 and December 31, 1998..... F-381
Condensed Statements of Income for the Quarters Ended March 31, 1999 and
1998................................................................... F-382
Condensed Statements of Partner's Capital for the Quarter Ended March
31, 1999 and for the Year Ended December 31, 1998...................... F-383
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998............................................................... F-384
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998.......................................................... F-385
Report of Independent Accountants....................................... F-386
Balance Sheets as of December 31, 1998 and 1997......................... F-387
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-388
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-389
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-390
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-391
</TABLE>
F-380
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,155,490 and $1,080,652
and allowance for loss on land and building of
$280,907 in 1999 and 1998............................ $23,099,071 $23,173,909
Net investment in direct financing leases............. 7,569,232 7,589,694
Investment in joint ventures.......................... 2,746,481 2,743,450
Cash and cash equivalents............................. 1,097,083 1,214,444
Receivables, less allowance for doubtful accounts of
$849 in 1999 and 1998................................ 38,803 62,465
Prepaid expenses...................................... 18,459 9,627
Organization costs, less accumulated amortization of
$10,000 and $9,549................................... -- 451
Accrued rental income................................. 1,655,430 1,565,014
----------- -----------
$36,224,559 $36,359,054
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 32,681 $ 592
Accrued and escrowed real estate taxes payable........ 20,072 16,019
Distributions payable................................. 800,000 800,000
Due to related party.................................. 10,561 23,337
Rents paid in advance................................. 13,304 53,206
----------- -----------
Total liabilities................................... 876,618 893,154
Partners' capital..................................... 35,347,941 35,465,900
----------- -----------
$36,224,559 $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
March 31,
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Rental income from operating leases..................... $ 594,046 $ 631,711
Earned income from direct financing leases.............. 210,162 263,229
Interest and other income............................... 11,104 20,186
--------- ---------
815,312 915,126
--------- ---------
Expenses:
General operating and administrative.................... 40,317 31,595
Professional services................................... 8,604 4,801
Management fees to related party........................ 8,051 8,770
Real estate taxes....................................... 8,690 --
State and other taxes................................... 21,191 20,143
Depreciation and amortization........................... 75,499 62,100
Transaction costs....................................... 32,820 --
--------- ---------
195,172 127,409
--------- ---------
Income Before Equity in Earnings of Joint Ventures........ 620,140 787,717
Equity in Earnings of Joint Ventures...................... 61,901 59,745
--------- ---------
Net Income................................................ $ 682,041 $ 847,462
========= =========
Allocation of Net Income:
General partners........................................ $ 6,821 $ 8,475
Limited partners........................................ 675,220 838,987
--------- ---------
$ 682,041 $ 847,462
========= =========
Net Income Per Limited Partner Unit....................... $ 0.17 $ 0.21
========= =========
Weighted Average Number of Limited Partner Units
Outstanding.............................................. 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>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 145,629 $ 117,411
Net income........................................ 6,821 28,218
----------- -----------
152,450 145,629
----------- -----------
Limited partners:
Beginning balance................................. 35,320,271 36,105,992
Net income........................................ 675,220 2,614,279
Distributions ($0.20 and $0.85 per limited partner
unit, respectively).............................. (800,000) (3,400,000)
----------- -----------
35,195,491 35,320,271
----------- -----------
Total partners' capital............................. $35,347,941 $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>
Quarter Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents
Net Cash Provided by
Operating Activities..... $ 682,639 $ 987,824
---------- ----------
Cash Flows from Financing
Activities:
Distributions to limited
partners................. (800,000) (800,000)
---------- ----------
Net cash used in
financing activities... (800,000) (800,000)
---------- ----------
Net Increase (Decrease) in
Cash and Cash Equivalents.. (117,361) 187,824
Cash and Cash Equivalents at
Beginning of Quarter....... 1,214,444 1,614,708
---------- ----------
Cash and Cash Equivalents at
End of Quarter............. $1,097,083 $1,802,532
========== ==========
Supplemental Schedule of
Non-Cash Financing
Activities:
Distributions declared and
unpaid at end of
quarter.................. $ 800,000 $1,000,000
========== ==========
</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 Ended March 31, 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 March 31, 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. 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 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 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 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were so recently filed, it is premature to further comment on the lawsuit at
this time.
3. 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 2 being adjusted to 1,866,951 shares valued at $20.00 per
APF share.
F-385
<PAGE>
Report of Independent 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-386
<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-387
<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-388
<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-389
<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-390
<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-391
<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-392
<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-393
<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-394
<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-395
<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-396
<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-397
<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-398
<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-399
<PAGE>
CNL INCOME FUND XVI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998...... F-401
Condensed Statements of Income for the Quarters Ended March 31, 1999
and 1998................................................................ F-402
Condensed Statements of Partner's Capital for the Quarter Ended March 31,
1999 and for the Year Ended December 31, 1998........................... F-403
Condensed Statements of Cash Flows for the Quarters Ended March 31, 1999
and 1998................................................................ F-404
Notes to Condensed Financial Statements for the Quarters Ended March 31,
1999 and 1998........................................................... F-405
Report of Independent Accountants........................................ F-407
Balance Sheets as of December 31, 1998 and 1997.......................... F-408
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-409
Statements of Partner's Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-410
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-411
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-412
</TABLE>
F-400
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,085,596 and $1,942,192
and allowance for loss on building of $266,257 in
1999 and 1998........................................ $30,852,599 $ 30,215,549
Net investment in direct financing leases............. 4,570,303 5,361,848
Investment in joint ventures.......................... 1,647,270 1,504,465
Cash and cash equivalents............................. 1,405,552 1,603,589
Receivables, less allowance for doubtful accounts of
$111,931 and $89,822................................. 31,749 63,214
Prepaid expenses...................................... 15,748 13,745
Organization costs, less accumulated amortization of
$10,000 and $8,550................................... -- 1,450
Accrued rental income................................. 1,510,250 1,424,781
----------- ------------
$40,033,471 $ 40,188,641
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 31,275 $ 1,816
Accrued and escrowed real estate taxes payable........ 23,462 7,163
Distributions payable................................. 900,000 900,000
Due to related party.................................. 10,797 26,476
Rents paid in advance and deposits.................... 70,617 61,262
----------- ------------
Total liabilities................................. 1,036,151 996,717
Commitment (Note 4)
Partners' capital..................................... 38,997,320 39,191,924
----------- ------------
$40,033,471 $ 40,188,641
=========== ============
</TABLE>
See accompanying notes to condensed financial statements.
F-401
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Rental income from operating leases..................... $ 798,369 $ 888,095
Earned income from direct financing leases.............. 133,545 175,047
Interest and other income............................... 19,953 14,761
--------- ---------
951,867 1,077,903
--------- ---------
Expenses:
General operating and administrative.................... 47,619 33,021
Professional services................................... 9,327 9,440
Management fees to related party........................ 9,001 9,963
Real estate taxes....................................... 17,153 --
State and other taxes................................... 23,165 19,302
Depreciation and amortization........................... 144,854 140,916
Transaction costs....................................... 33,158 --
--------- ---------
284,277 212,642
--------- ---------
Income Before Equity in Earnings of Joint Ventures........ 667,590 865,261
Equity in Earnings of Joint Ventures...................... 37,806 31,434
--------- ---------
Net Income................................................ $ 705,396 $ 896,695
========= =========
Allocation of Net Income:
General partners........................................ $ 7,054 $ 8,967
Limited partners........................................ 698,342 887,728
--------- ---------
$ 705,396 $ 896,695
========= =========
Net Income Per Limited Partner Unit....................... $ 0.16 $ 0.20
========= =========
Weighted Average Number of Limited Partner Units
Outstanding.............................................. 4,500,000 4,500,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-402
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
------------- ------------
1999 1998
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................ $ 131,300 $ 99,615
Net income....................................... 7,054 31,685
----------- -----------
138,354 131,300
----------- -----------
Limited partners:
Beginning balance................................ 39,060,624 39,805,311
Net income....................................... 698,342 2,945,313
Distributions ($0.20 and $0.82 per limited partner
unit, respectively)............................... (900,000) (3,690,000)
----------- -----------
38,858,966 39,060,624
----------- -----------
Total partners' capital............................ $38,997,320 $39,191,924
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-403
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............. $ 847,198 $1,091,044
---------- ----------
Cash Flows from Investing Activities:
Investment in joint ventures......................... (145,235) (607,896)
Decrease in restricted cash.......................... -- 610,410
---------- ----------
Net cash provided by (used in) investing
activities........................................ (145,235) 2,514
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................... (900,000) (900,000)
---------- ----------
Net cash used in financing activities.............. (900,000) (900,000)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... (198,037) 193,558
Cash and Cash Equivalents at Beginning of Quarter...... 1,603,589 1,673,869
---------- ----------
Cash and Cash Equivalents at End of Quarter............ $1,405,552 $1,867,427
========== ==========
Supplemental Schedule of Non-Cash Financing Activities:
Distributions declared and unpaid at end of quarter... $ 900,000 $ 990,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-404
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 March 31, 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. Investment in Direct Financing Leases:
During the quarter ended March 31, 1999, a tenant, L.C. West, L.L.C.
terminated its lease and ceased making rental payments to the Partnership due
to financial difficulties the tenant experienced. 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. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
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 4,320,947 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 three previous public
offerings, the most recent of which was 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 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
F-405
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Ended March 31, 1999 and 1998
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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with the
proposed Merger. Additionally, on June 22, 1999, a limited partner of the CNL
Income Funds filed a lawsuit against us and APF 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. Because the lawsuits
were recently filed, it is premature to further comment on the lawsuit at this
time.
4. Commitment:
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 therewith, the Partnership has agreed to pay up to
$150,000 in renovation costs, none of which were incurred as of March 31, 1999.
5. 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 3 being adjusted to 2,160,474 shares valued at $20.00 per
APF share.
F-406
<PAGE>
Report of Independent 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-407
<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-408
<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-409
<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-410
<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-411
<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-412
<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-413
<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-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 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-415
<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-416
<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-417
<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-418
<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-419
<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-420
<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 March 31, 1999................. F-423
Unaudited Pro Forma Statement of Earnings--For the Quarter Ended March
31, 1999............................................................... F-424
Unaudited Pro Forma Statement of Earnings--For the Year Ended December
31, 1998............................................................... F-426
Unaudited Pro Forma Statement of Cash Flows--For the Quarter Ended March
31, 1999............................................................... F-428
Unaudited Pro Forma Statement of Cash Flows--For the Year Ended December
31, 1998............................................................... F-430
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................. F-432
</TABLE>
F-421
<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 CFS and CFC) 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 March 31,
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 May 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.
F-422
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
as of March 31, 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.............. $475,787,661 $ 58,749,637(A) $534,537,298 -- -- -- --
Net Investment in
Direct Financing
Leases........... 123,270,117 -- 123,270,117 -- -- -- --
Mortgages and
Notes
Receivable....... 41,269,740 -- 41,269,740 -- -- 247,896,287 --
Other
Investments...... 16,199,792 -- 16,199,792 -- -- 6,353,482 --
Investment In
Joint Ventures... 1,083,564 -- 1,083,564 -- -- -- --
Cash and Cash
Equivalents...... 37,803,397 (25,093,119)(A) 12,710,278 591,712 552,415 5,749,931 (1,965,276)(B1)
Receivables/Due
From Related
Parties.......... 548,862 -- 548,862 7,141,967 5,457,493 1,969,339 (148,629)(C)
Accrued Rental
Income........... 5,007,334 -- 5,007,334 -- -- --
Other Assets..... 7,723,678 -- 7,723,678 490,141 298,498 2,731,394 40,536,957 (B1)
(2,792,876)(B1)
------------ ------------ ------------ ----------- ---------- ------------ ------------
Total Assets.... $708,694,145 $ 33,656,518 $742,350,663 $ 8,223,820 $6,308,406 $264,700,433 $ 35,630,176
============ ============ ============ =========== ========== ============ ============
LIABILITIES AND
EQUITY
Accounts Payable
and accrued
liabilities...... $ 3,464,190 -- $ 3,464,190 $ 576,531 $ 304,375 $ 1,613,959 --
Accrued
Construction
Costs Payable.... 10,172,169 -- 10,172,169 -- -- -- --
Distributions
Payable.......... 0 -- 0 119,808 -- -- --
Due to Related
Parties.......... 148,629 -- 148,629 -- 563,724 31,310,681 (148,629)(C)
Income Tax
Payable.......... 0 -- 0 -- -- 271,741 (271,741)(D)
Line of
Credit/Notes
payable.......... 34,150,000 33,656,518 (A) 67,806,518 386,229 -- 226,937,481 --
Deferred Income.. 2,052,530 -- 2,052,530 -- -- -- --
Rents Paid in
Advance.......... 1,340,636 -- 1,340,636 -- -- -- --
Minority
Interest......... 280,970 -- 280,970 -- -- -- --
Common Stock..... 373,483 -- 373,483 -- -- -- 61,500 (B1)
Common Stock--
Class A.......... -- -- -- 6,400 2,000 200 (8,600)(B1)
Common Stock--
Class B.......... -- -- -- 3,600 724 501 (4,825)(B1)
Additional Paid-
in-Capital....... 670,005,177 -- 670,005,177 4,617,047 5,303,503 3,937,095 122,938,500 (B1)
(13,857,645)(B1)
Accumulated
distributions in
excess of net
earnings......... (13,293,639) -- (13,293,639) 2,514,205 134,080 628,775 (3,277,060)(B1)
(70,073,065)(B1)
271,741 (B1)
Partners
Capital.......... -- -- -- -- -- -- --
------------ ------------ ------------ ----------- ---------- ------------ ------------
Total
Liabilities and
Equity.......... $708,694,145 $ 33,656,518 $742,350,663 $ 8,223,820 $6,308,406 $264,700,433 $ 35,630,176
============ ============ ============ =========== ========== ============ ============
<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.............. $ 534,537,298 $283,660,209 $ 90,953,669 (B2) $ 909,151,176
Net Investment in
Direct Financing
Leases........... 123,270,117 81,122,373 23,206,625 (B2) 227,599,115
Mortgages and
Notes
Receivable....... 289,166,027 4,414,245 -- 293,580,272
Other
Investments...... 22,553,274 -- -- 22,553,274
Investment In
Joint Ventures... 1,083,564 50,891,342 16,083,265 (B2) 68,058,171
Cash and Cash
Equivalents...... 17,639,060 20,355,156 (8,737,724)(B2) 22,958,492
(6,298,000)(B2)
Receivables/Due
From Related
Parties.......... 14,969,032 621,342 (1,042,835)(E) 14,547,539
Accrued Rental
Income........... 5,007,334 18,227,192 (18,227,192)(B2) 5,007,334
Other Assets..... 775,385 (775,385)(B2)
48,987,792 48,987,792
---------------- ------------ ----------------- ---------------
Total Assets.... $ 1,057,213,498 $460,067,244 $ 95,162,423 $1,612,443,165
================ ============ ================= ===============
LIABILITIES AND
EQUITY
Accounts Payable
and accrued
liabilities...... $ 5,959,055 $ 860,632 -- $ 6,819,687
Accrued
Construction
Costs Payable.... 10,172,169 -- -- 10,172,169
Distributions
Payable.......... 119,808 11,629,504 -- 11,749,312
Due to Related
Parties.......... 31,874,405 1,042,835 (1,042,835)(E) 31,874,405
Income Tax
Payable.......... -- -- -- --
Line of
Credit/Notes
payable.......... 295,130,228 -- -- 295,130,228
Deferred Income.. 2,052,530 -- -- 2,052,530
Rents Paid in
Advance.......... 1,340,636 915,429 -- 2,256,065
Minority
Interest......... 280,970 1,257,358 -- 1,538,328
Common Stock..... 434,983 -- 270,283 (B2) 705,266
Common Stock--
Class A.......... -- -- -- --
Common Stock--
Class B.......... -- -- -- --
Additional Paid-
in-Capital....... -- 540,296,461 (B2)
792,943,677 1,333,240,138
Accumulated
distributions in
excess of net
earnings......... -- --
(83,094,963) (83,094,963)
Partners
Capital.......... -- 444,361,486 (444,361,486)(B2) --
---------------- ------------ ----------------- ---------------
Total
Liabilities and
Equity.......... $ 1,057,213,498 $460,067,244 $ 95,162,423 $1,612,443,165
================ ============ ================= ===============
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-423
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
for the Quarter Ended March 31, 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... $12,184,008 2,339,153(a) $14,523,161 $ -- $ 0 $ 0 0
Fees............ -- -- -- 2,307,364 1,391,466 8,137 (2,450,663)(b),(c)
Interest and
Other Income.... 2,214,763 -- 2,214,763 47,213 129,362 5,233,919 62,068 (d)
----------- ---------- ----------- --------- --------- --------- -----------
Total Revenue... 14,398,771 2,339,153 16,737,924 2,354,577 1,520,828 5,242,056 (2,388,595)
Expenses:
General and
Administrative.. 1,095,269 -- 1,095,269 2,563,714 1,323,577 64,186 (377,734)(e)
Management and
Advisory Fees... 697,364 -- 697,364 -- -- 611,196 (1,308,560)(f)
Fees to Related
Parties......... -- -- -- 23,326 292,575 -- (292,786)(g)
Interest
Expense......... -- -- -- 50,730 -- 4,769,268 --
State Taxes..... 235,208 -- 235,208 -- -- -- --
Depreciation--
Other........... -- -- -- 39,581 26,238 -- --
Depreciation--
Property........ 1,548,813 349,465(a) 1,898,278 -- -- -- --
Amortization.... 7,368 -- 7,368 -- -- -- 506,712 (h)
Transaction
Costs........... 125,926 -- 125,926 -- -- -- --
----------- ---------- ----------- --------- --------- --------- -----------
Total Expenses.. 3,709,948 349,465 4,059,413 2,677,351 1,642,390 5,444,650 (1,472,368)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Loss on
Properties....... 10,688,823 1,989,688 12,678,511 (322,774) (121,562) (202,594) (916,227)
Equity in
Earnings of
Joint
Ventures/Minority
Interest........ 17,271 -- 17,271 -- -- -- --
Gain on Sale of
Properties...... -- -- -- -- -- -- --
Provision For
Loss on
Properties...... (215,797) -- (215,797) -- -- -- --
----------- ---------- ----------- --------- --------- --------- -----------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes........... 10,490,297 1,989,688 12,479,985 (322,774) (121,562) (202,594) (916,227)
Benefit/(Provision)
for Federal
Income Taxes.... 0 0 0 127,496 48,017 73,166 (248,679)(i)
----------- ---------- ----------- --------- --------- --------- -----------
Net
Earnings(Losses).. $10,490,297 $1,989,688 $12,479,985 $(195,278) $ (73,545) $(129,428) $(1,164,906)
=========== ========== =========== ========= ========= ========= ===========
Earnings Per
Share............ $ 0.28 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========= ========= ========= ===========
Book Value Per
Share............ $ 17.59 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========= ========= ========= ===========
Dividends per
share/unit....... $ 0.38 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========= ========= ========= ===========
Ratio of Earnings
to Fixed
Charges.......... 50.03x n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========= ========= ========= ===========
Wtd. Avg. Shares
Outstanding...... 37,347,401 n/a 37,347,401 n/a n/a n/a 6,150,000
=========== ========== =========== ========= ========= ========= ===========
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ ------------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental and
Earned Income... $14,523,161 $10,682,007 276,874 (j) $25,482,042
Fees............ 1,256,304 -- (277,876)(k) 978,428
Interest and
Other Income.... 7,687,325 335,689 -- 8,023,014
------------ ------------ ------------------- ---------------
Total Revenue... 23,466,790 11,017,696 (1,002) 34,483,484
Expenses:
General and
Administrative.. 4,669,012 835,255 (409,390)(l),(m) 5,094,877
Management and
Advisory Fees... -- 55,198 (55,198)(n) --
Fees to Related
Parties......... 23,115 -- -- 23,115
Interest
Expense......... 4,819,998 -- -- 4,819,998
State Taxes..... 235,208 279,692 111,521 (o) 626,421
Depreciation--
Other........... 65,819 -- 0 65,819
Depreciation--
Property........ 1,898,278 1,395,730 510,725 (p) 3,804,733
Amortization.... 514,080 7,737 -- 521,817
Transaction
Costs........... 125,926 530,427 -- 656,353
------------ ------------ ------------------- ---------------
Total Expenses.. 12,351,436 3,104,039 157,658 15,613,133
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Loss on
Properties....... 11,115,354 7,913,657 (158,660) 18,870,351
Equity in
Earnings of
Joint
Ventures/Minority
Interest........ 17,271 1,131,714 (128,387)(q) 1,020,598
Gain on Sale of
Properties...... -- 738,775 -- 738,775
Provision For
Loss on
Properties...... (215,797) (60,882) -- (276,679)
------------ ------------ ------------------- ---------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes........... 10,916,828 9,723,264 (287,047) 20,353,045
Benefit/(Provision)
for Federal
Income Taxes.... -- -- -- 0
------------ ------------ ------------------- ---------------
Net
Earnings(Losses).. $10,916,828 $ 9,723,264 $ (287,047) $20,353,045
============ ============ =================== ===============
Earnings Per
Share............ n/a $ n/a n/a $ 0.29
============ ============ =================== ===============
Book Value Per
Share............ n/a $ n/a n/a $ 17.74
============ ============ =================== ===============
Dividends per
share/unit....... n/a n/a n/a n/a
============ ============ =================== ===============
Ratio of Earnings
to Fixed
Charges.......... n/a n/a n/a 5.08x
============ ============ =================== ===============
Wtd. Avg. Shares
Outstanding...... 43,497,401 n/a 27,028,337 70,525,738 (r)
============ ============ =================== ===============
</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 Quarter Ended March 31, 1999 (cont.)
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining Historical Merger
Historical Pro Forma Historical Financial Financial Pro Forma Combined Income Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments APF Funds Adjustments
---------- ----------- -------- ---------- -------------- ---------- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Calculation of
Pro Forma
Distributions:
Pro Forma Cash
from Operations
from Statement
of Cash Flows... -- -- -- -- -- -- -- -- -- --
Addback Pro
Forma
Investments in
Notes
Receivable...... -- -- -- -- -- -- -- -- -- --
Adjusted Pro
Forma
Distributions... -- -- -- -- -- -- -- -- -- --
Pro Forma
Weighted Average
Dollars
Outstanding..... -- -- -- -- -- -- -- -- -- --
Pro Forma Cash
Distributions
Declared Per
$10,000
investment...... -- -- -- -- -- -- -- -- -- --
<CAPTION>
Adjusted
Pro Forma
-----------------
<S> <C>
Calculation of
Pro Forma
Distributions:
Pro Forma Cash
from Operations
from Statement
of Cash Flows... $ (11,847,307)
Addback Pro
Forma
Investments in
Notes
Receivable...... 42,571,895
-----------------
Adjusted Pro
Forma
Distributions... 30,724,588(s)
=================
Pro Forma
Weighted Average
Dollars
Outstanding..... 1,410,514,764(t)
=================
Pro Forma Cash
Distributions
Declared Per
$10,000
investment...... $ 217(u)
=================
</TABLE>
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 21,919,865 (a) $55,049,526 $ -- $ -- $ -- --
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 21,919,865 64,106,902 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 2,889,368(a) 6,931,658 -- -- -- (340,898)(r)
Amortization.... 11,808 -- 11,808 57,077 -- 95,116 2,026,848 (h)
Transaction
Costs........... 157,054 -- 157,054 -- -- -- --
----------- ----------- ----------- ----------- --------- ---------- ------------
Total Expenses.. 9,408,957 2,889,368 12,298,325 11,435,228 7,966,916 25,677,829 (9,376,100)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, Gain
on
Securitization,
Other Expenses,
Provision for
Losses on
Properties and
Other Expenses... 32,778,080 19,030,497 51,808,577 17,613,851 (773,774) (3,020,614) (23,132,524)
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
Federal Income
Taxes............ 32,152,408 19,030,497 51,182,905 17,613,851 (773,774) 673,737 (23,132,524)
Benefit/(Provision)
for Federal
Income Taxes.... -- -- -- (6,957,472) 305,641 (246,603) 6,898,434 (i)
----------- ----------- ----------- ----------- --------- ---------- ------------
Net
Earnings(Losses).. $32,152,408 $19,030,497 $51,182,905 $10,656,379 $(468,133) $ 427,134 $(16,234,090)
=========== =========== =========== =========== ========= ========== ============
Earnings Per
Share............ $ 1.21 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========= ========== ============
Book Value Per
Share............ $ 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
=========== =========== =========== =========== ========= ========== ============
Wtd. Avg. Shares
Outstanding...... 26,648,219 7,851,320 34,499,539 n/a n/a n/a 6,150,000
=========== =========== =========== =========== ========= ========== ============
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Rental and
Earned Income... $55,049,521 $43,462,064 $1,107,494 (j) $99,619,084
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... 90,497,714 45,229,837 369,596 136,097,147
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) 0
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........ 6,590,760 5,407,088 2,042,902 (p) 14,040,750
Amortization.... 2,190,849 164,917 -- 2,355,766
Transaction
Costs........... 157,054 315,081 -- 472,135
------------ ------------ ----------------- ------------
Total Expenses.. 48,002,198 9,602,972 776,872 58,382,042
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, Gain
on
Securitization,
Other Expenses,
Provision for
Losses on
Properties and
Other Expenses... 42,495,516 35,626,865 (407,276) 77,715,105
Equity in
Earnings of
Joint
Ventures/Minority
Interest........ (14,138) 3,569,877 (513,548)(q) 3,042,191
Gain on Sale of
Properties...... -- 2,519,894 -- 2,519,894
Gain on
Securitization.. 3,694,351 0 -- 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
Federal Income
Taxes............ 45,564,195 38,837,148 (920,824) 83,480,519
Benefit/(Provision)
for Federal
Income Taxes.... -- -- -- --
------------ ------------ ----------------- ------------
Net
Earnings(Losses).. $45,564,195 $38,837,148 $ (920,824) $83,480,519
============ ============ ================= ============
Earnings Per
Share............ n/a n/a n/a $ 1.23
============ ============ ================= ============
Book Value Per
Share............ n/a n/a n/a $ 17.76
============ ============ ================= ============
Dividend per
share/unit....... n/a n/a n/a n/a
============ ============ ================= ============
Ratio of Earnings
to Fixed
Charges.......... n/a n/a n/a 4.87x
============ ============ ================= ============
Wtd. Avg. Shares
Outstanding...... 40,649,539 n/a 27,028,337 67,677,876
============ ============ ================= ============
</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 EARNINGS
for the Year Ended December 31, 1998 (cont.)
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical Combining Historical
Historical Pro Forma Historical Financial CNL Financial Pro Forma Combined Income
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments APF Funds
---------- ----------- -------- ---------- -------------- ------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Calculation of
Pro Forma
Distributions:
Pro Forma Cash
from Operations
from Statement
of Cash Flows... -- -- -- -- -- -- -- -- --
Addback Pro
Forma
Investments in
Notes
Receivable...... -- -- -- -- -- -- -- -- --
Subtract Pro
Forma Net Cash
Proceeds From
Securitization
of Notes
Receivable...... -- -- -- -- -- -- -- -- --
Adjusted Pro
Forma
Distributions
Declared........ -- -- -- -- -- -- -- -- --
Pro Forma
Weighted Average
Dollars
Outstanding..... -- -- -- -- -- -- -- -- --
Pro Forma Cash
Distributions
Per $10,000
Investment...... -- -- -- -- -- -- -- -- --
<CAPTION>
Merger
Pro Forma Adjusted
Adjustments Pro Forma
----------- ----------------
<S> <C> <C>
Calculation of
Pro Forma
Distributions:
Pro Forma Cash
from Operations
from Statement
of Cash Flows... -- $104,158,992
Addback Pro
Forma
Investments in
Notes
Receivable...... -- 288,590,674
Subtract Pro
Forma Net Cash
Proceeds From
Securitization
of Notes
Receivable...... -- (265,871,668)
----------------
Adjusted Pro
Forma
Distributions
Declared........ -- 126,877,998(t)
================
Pro Forma
Weighted Average
Dollars
Outstanding..... -- 1,353,557,533(u)
================
Pro Forma Cash
Distributions
Per $10,000
Investment...... -- 937(v)
================
</TABLE>
F-427
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
for the Quarter Ended March 31, 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).......... $10,490,297 $1,989,688(a) $12,479,985 $ (195,278) $(73,545) $ (129,428) $(1,164,906)(a)
Adjustments to
reconcile net
income to net
cash provided by
operating
activities:
Depreciation..... 1,548,813 349,465(b) 1,898,278 39,581 -- -- --
Amortization
expense......... 7,368 -- 7,368 -- 26,238 424,697 506,712 (c)
Minority interest
in income of
consolidated
joint venture... 7,763 -- 7,763 -- -- -- --
Equity in
earnings of
joint ventures,
net of
distributions... 23,234 -- 23,234 -- -- -- --
Loss (gain) on
sale of land,
buildings, and
net investment
in direct
financing
leases.......... -- -- -- -- -- -- --
Provision for
loss on land,
buildings, and
direct financing
leases.......... 215,797 -- 215,797 -- -- (73,166) --
Gain on
securitization.. -- -- -- -- -- -- --
Net cash proceeds
from
securitization
of notes
receivable...... -- -- -- -- -- -- --
Decrease(increase)
in other
receivables..... (82,660) -- (82,660) (377,933) (242,251) (6,771) --
Increase in
accrued interest
income included
in notes
receivable...... -- -- -- -- -- -- --
Decrease(increase)
in accrued
interest on
mortgage note
receivable...... -- -- -- -- -- (449,580) --
Investment in
notes
receivable...... -- -- -- -- -- (42,571,895) --
Collections on
notes
receivable...... -- -- -- -- -- 6,417,907 --
Increase in
restricted
cash............ -- -- -- -- -- (402,461) --
Decrease in due
from related
party........... -- -- -- -- -- 55,382 --
Decrease(increase)
in prepaid
expenses........ 27,548 -- 27,548 -- 1,811 -- --
Decrease in net
investment in
direct financing
leases.......... 787,375 -- 787,375 -- -- -- --
Increase in
accrued rental
income.......... (1,047,421) -- (1,047,421) -- -- -- --
Decrease(increase)
in intangibles
and other
assets.......... -- -- -- (30,554) -- 7,942 --
Increase(decrease)
in accounts
payable, accrued
expenses and
other
liabilities..... 306,277 -- 306,277 (840,058) (130,506) (103,980) --
Increase(decrease)
in due to
related parties,
excluding
reimbursement of
acquisition, and
stock issuance
costs paid on
behalf of the
entity.......... 71,853 -- 71,853 25,550 -- -- --
Decrease in
accrued
interest........ -- -- -- -- -- (362,877) --
Increase in rents
paid in advance -- -- -- -- -- -- --
and deposits.... 386,365 -- 386,365 -- -- -- --
Increase(decrease)
in deferred
rental income... 862,647 -- 862,647 -- -- -- --
----------- ---------- ----------- ---------- -------- ------------ -----------
Total
adjustments.... 3,114,959 349,465 3,464,424 (1,183,414) (344,708) (37,064,802) 506,712
----------- ---------- ----------- ---------- -------- ------------ -----------
Net cash
provided
by(used in)
operating
activities..... 13,605,256 2,339,153 15,944,409 (1,378,692) (418,253) (37,194,230) (658,194)
<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).......... $ 10,916,828 $9,723,264 $(287,048)(a) $ 20,353,044
Adjustments to
reconcile net
income to net
cash provided by
operating
activities:
Depreciation..... 1,937,859 1,395,728 510,725 (b) 3,844,312
Amortization
expense......... 965,015 7,739 -- 972,754
Minority interest
in income of
consolidated
joint venture... 7,763 28,752 -- 36,515
Equity in
earnings of
joint ventures,
net of
distributions... 23,234 226,219 128,387 (d) 377,840
Loss (gain) on
sale of land,
buildings, and
net investment
in direct
financing
leases.......... -- (738,775) -- (738,775)
Provision for
loss on land,
buildings, and
direct financing
leases.......... 142,631 60,882 -- 203,513
Gain on
securitization.. -- -- -- 0
Net cash proceeds
from
securitization
of notes
receivable...... -- -- -- 0
Decrease(increase)
in other
receivables..... (709,615) 699,619 -- (9,996)
Increase in
accrued interest
income included
in notes
receivable...... -- -- -- 0
Decrease(increase)
in accrued
interest on
mortgage note
receivable...... (449,580) 2,115 -- (447,465)
Investment in
notes
receivable...... (42,571,895) -- -- (42,571,895)
Collections on
notes
receivable...... 6,417,907 -- -- 6,417,907
Increase in
restricted
cash............ (402,461) -- -- (402,461)
Decrease in due
from related
party........... 55,382 -- -- 55,382
Decrease(increase)
in prepaid
expenses........ 29,359 (109,934) -- (80,575)
Decrease in net
investment in
direct financing
leases.......... 787,375 317,468 -- 1,104,843
Increase in
accrued rental
income.......... (1,047,421) (541,054) -- (1,588,475)
Decrease(increase)
in intangibles
and other
assets.......... (22,612) -- -- (22,612)
Increase(decrease)
in accounts
payable, accrued
expenses and
other
liabilities..... (768,267) 560,034 -- (208,233)
Increase(decrease)
in due to
related parties,
excluding
reimbursement of
acquisition, and
stock issuance
costs paid on
behalf of the
entity.......... 97,403 (121,040) -- (23,637)
Decrease in
accrued
interest........ (362,877) -- -- (362,877)
Increase in rents
paid in advance -- -- -- --
and deposits.... 386,365 (5,428) -- 380,937
Increase(decrease)
in deferred
rental income... 862,647 -- -- 862,647
------------- ----------- -------------- -------------
Total
adjustments.... (34,621,788) 1,782,325 639,112 (32,200,357)
------------- ----------- -------------- -------------
Net cash
provided
by(used in)
operating
activities..... (23,704,960) 11,505,589 352,064 (11,847,307)
</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--(Continued)
for the Quarter Ended March 31, 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....... -- -- -- -- -- -- --
Additions to
land and
buildings on
operating
leases.......... (77,028,830) (58,749,637)(e) (135,778,467) (31,577) (10,092) -- --
Investment in
direct financing
leases.......... (29,608,346) -- (29,608,346) -- -- -- --
Investment in
joint venture... (117,662) -- (117,662) -- -- -- --
Acquisition of
businesses...... -- -- -- -- -- -- (1,965,276)(f)
Purchase of
other
investments..... -- -- -- -- -- -- --
Net loss in
market value
from investments
in trading
securities...... -- -- -- -- -- -- --
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... -- -- -- -- -- 134,981 --
Investment in
mortgage notes
receivable...... (1,388,463) -- (1,388,463) -- -- -- --
Collections on
mortgage note
receivable...... 75,010 -- 75,010 -- -- -- --
Investment in
notes
receivable...... (1,087,483) -- (1,087,483) -- -- -- --
Collection on
notes
receivable...... 239,596 -- 239,596 -- -- -- --
Decrease in
restricted
cash............ -- -- -- -- -- -- --
Increase in
intangibles and
other assets.... -- -- -- -- -- -- --
Investment in
certificates of
deposit......... -- -- -- -- -- -- --
Other........... -- -- -- -- -- -- --
------------ ------------ ------------ --------- -------- ----------- -----------
Net cash
provided by
(used in)
investing
activities...... (108,916,178) (58,749,637) (167,665,815) (31,577) (10,092) 134,981 (1,965,276)
Cash Flows from
Financing
Activities:
Subscriptions
received from
stockholders.... 210,735 -- 210,735 1,288,673 20,572 -- --
Contributions
from limited
partners........ -- -- -- -- -- -- --
Contributions
from holder of
minority
interest........ -- -- -- -- -- -- --
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (1,142,237) -- (1,142,237) -- -- -- --
Payment of stock
issuance costs.. (722,001) -- (722,001) -- -- -- --
Proceeds from
borrowing on
line of
credit/notes
payable......... 36,587,245 33,656,518 (e) 70,243,763 -- -- 49,730,934 --
Payment on line
of credit/notes
payable......... (12,580,289) -- (12,580,289) -- (2,385) (10,291,473) --
Retirement of
shares of common
stock........... -- -- -- -- -- -- --
Distributions to
holders of
minority
interest........ (8,610) -- (8,610) -- -- -- --
Distributions to
limited
partners........ -- -- -- -- -- -- --
Distributions to
stockholders.... (14,237,405) -- (14,237,405) -- -- -- --
Other........... (200,234) -- (200,234) -- -- (9,602) --
------------ ------------ ------------ --------- -------- ----------- -----------
Net cash
provided by
(used in)
financing
activities...... 7,907,204 33,656,518 41,563,722 1,288,673 18,187 39,429,859 --
Net increase in
cash............. (87,403,718) (22,753,966) (110,157,684) (121,596) (410,158) 2,370,610 (2,623,470)
Cash at beginning
of year.......... 123,199,837 -- 123,199,837 713,308 962,573 2,526,078 --
------------ ------------ ------------ --------- -------- ----------- -----------
Cash at end of
year............. $ 35,796,119 $(22,753,966) $ 13,042,153 $ 591,712 $552,415 $ 4,896,688 $(2,623,470)
============ ============ ============ ========= ======== =========== ===========
<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....... -- 5,341,437 -- 5,341,437
Additions to
land and
buildings on
operating
leases.......... (135,820,136) (3,563,230) -- (139,383,366)
Investment in
direct financing
leases.......... (29,608,346) (1,307,530) -- (30,915,876)
Investment in
joint venture... (117,662) (2,011,650) -- (2,129,312)
Acquisition of
businesses...... (1,965,276) -- (15,035,724)(g) (17,001,000)
Purchase of
other
investments..... -- -- -- 0
Net loss in
market value
from investments
in trading
securities...... -- -- -- 0
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... 134,981 -- -- 134,981
Investment in
mortgage notes
receivable...... (1,388,463) -- -- (1,388,463)
Collections on
mortgage note
receivable...... 75,010 571,042 -- 646,052
Investment in
notes
receivable...... (1,087,483) -- -- (1,087,483)
Collection on
notes
receivable...... 239,596 -- -- 239,596
Decrease in
restricted
cash............ 0 1,846,206 -- 1,846,206
Increase in
intangibles and
other assets.... 0 -- -- 0
Investment in
certificates of
deposit......... 0 -- -- 0
Other........... 0 (66,475) -- (66,475)
------------- ------------ ---------------- -------------
Net cash
provided by
(used in)
investing
activities...... (169,537,779) 809,800 (15,035,724) (183,703,703)
Cash Flows from
Financing
Activities:
Subscriptions
received from
stockholders.... 1,519,980 -- -- 1,519,980
Contributions
from limited
partners........ -- -- -- 0
Contributions
from holder of
minority
interest........ -- -- -- 0
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (1,142,237) -- -- (1,142,237)
Payment of stock
issuance costs.. (722,001) -- -- (722,001)
Proceeds from
borrowing on
line of
credit/notes
payable......... 119,974,697 -- -- 119,974,697
Payment on line
of credit/notes
payable......... (22,874,147) -- -- (22,874,147)
Retirement of
shares of common
stock........... -- -- -- 0
Distributions to
holders of
minority
interest........ (8,610) (31,774) -- (40,384)
Distributions to
limited
partners........ -- (12,304,504) -- (12,304,504)
Distributions to
stockholders.... (14,237,405) -- -- (14,237,405)
Other........... (209,836) -- -- (209,836)
------------- ------------ ---------------- -------------
Net cash
provided by
(used in)
financing
activities...... 82,300,441 (12,336,278) -- 69,964,163
Net increase in
cash............. (110,942,298) (20,889) (14,683,660) (125,646,847)
Cash at beginning
of year.......... 127,401,796 19,697,870 -- 147,099,666
------------- ------------ ---------------- -------------
Cash at end of
year............. $ 16,459,498 $19,676,981 $(14,683,660) $ 21,452,819
============= ============ ================ =============
</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
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 $19,030,497(a) $51,182,905 $10,656,379 $(468,133) $ 427,134 $(16,234,090)(a)
Adjustments to
reconcile net
income (loss) to
net cash
provided by
(used in)
operating
activities:
Depreciation.... 4,042,290 2,889,368(b) 6,931,658 119,923 79,234 -- (340,898)(b)
Amortization
expense......... 11,808 -- 11,808 56,003 -- 2,246,273 2,026,848 (c)
Minority
interest in
income of
consolidated
joint venture... 30,156 -- 30,156 -- -- -- --
Equity in
earnings of
joint ventures,
net of
distributions... (15,440) -- (15,440) -- -- -- --
Loss (gain) on
sale of land,
building, net
investment in
direct leases... -- -- -- -- -- -- --
Provision for
loss on land,
buildings, and
direct financing
leases/provision
for deferred
taxes........... 611,534 -- 611,534 -- -- 398,042 --
Gain on
securitization.. -- -- -- -- -- (3,356,538) --
Net cash
proceeds from
securitization
of notes
receivable...... -- -- -- -- -- 265,871,668 --
Decrease
(increase) in
other
receivables..... 899,572 -- 899,572 (3,896,090) -- 453,105 --
Increase in
accrued interest
income included
in notes
receivable...... -- -- -- -- -- (170,492) --
Increase in
accrued interest
on mortgage note
receivable...... -- -- -- -- -- -- --
Investment in
notes
receivable...... -- -- -- -- -- (288,590,674) --
Collections on
notes
receivable...... -- -- -- -- -- 23,539,641 --
Decrease in
restricted
cash............ -- -- -- -- -- 2,504,091 --
Decrease
(increase) in
due from related
party........... -- -- -- -- 89,839 (1,043,527) --
Increase in
prepaid
expenses........ -- -- -- -- 7,246 -- --
Decrease in net
investment in
direct financing
leases.......... 1,971,634 -- 1,971,634 -- -- -- --
Increase in
accrued rental
income.......... (2,187,652) -- (2,187,652) -- -- -- --
Increase in
intangibles and
other assets.... (29,477) -- (29,477) (44,716) (20,635) (59,523) --
Increase
(decrease) in
accounts
payable, accrued
expenses and
other
liabilities..... 467,972 -- 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 -- 31,255 -- (164,619) -- --
Increase in
accrued
interest........ -- -- -- -- -- (77,968) --
Increase in
rents paid in
advance and
deposits........ 436,843 -- 436,843 -- -- -- --
Decrease in
deferred rental
income.......... 693,372 -- 693,372 -- -- -- --
----------- ----------- ----------- ----------- --------- ------------ ------------
Total
adjustments..... 6,963,867 2,889,368 9,853,235 (3,608,563) 316,963 1,610,591 1,685,950
----------- ----------- ----------- ----------- --------- ------------ ------------
Net cash
provided by
(used in)
operating
activities...... 39,116,275 21,919,865 61,036,140 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)........... $ 45,564,195 $38,837,148 $(920,824)(a) $ 83,480,519
Adjustments to
reconcile net
income (loss) to
net cash
provided by
(used in)
operating
activities:
Depreciation.... 6,789,917 5,480,693 2,042,902 (b) 14,313,512
Amortization
expense......... 4,340,932 91,136 -- 4,432,068
Minority
interest in
income of
consolidated
joint venture... 30,156 103,284 -- 133,440
Equity in
earnings of
joint ventures,
net of
distributions... (15,440) 1,168,091 513,548 (d) 1,666,199
Loss (gain) on
sale of land,
building, net
investment in
direct leases... -- (2,519,894) -- (2,519,894)
Provision for
loss on land,
buildings, and
direct financing
leases/provision
for deferred
taxes........... 1,009,576 2,834,338 -- 3,843,914
Gain on
securitization.. (3,356,538) -- -- (3,356,538)
Net cash
proceeds from
securitization
of notes
receivable...... 265,871,668 -- -- 265,871,668
Decrease
(increase) in
other
receivables..... (2,543,413) (53,211) -- (2,596,624)
Increase in
accrued interest
income included
in notes
receivable...... (170,492) -- -- (170,492)
Increase in
accrued interest
on mortgage note
receivable...... -- (6,533) -- (6,533)
Investment in
notes
receivable...... (288,590,674) -- -- (288,590,674)
Collections on
notes
receivable...... 23,539,641 -- -- 23,539,641
Decrease in
restricted
cash............ 2,504,091 -- -- 2,504,091
Decrease
(increase) in
due from related
party........... (953,688) -- -- (953,688)
Increase in
prepaid
expenses........ 7,246 18,470 -- 25,716
Decrease in net
investment in
direct financing
leases.......... 1,971,634 1,273,904 -- 3,245,538
Increase in
accrued rental
income.......... (2,187,652) (376,728) -- (2,564,380)
Increase in
intangibles and
other assets.... (154,351) (2,380) -- (156,731)
Increase
(decrease) in
accounts
payable, accrued
expenses and
other
liabilities..... 846,680 (194,293) -- 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 -- 94,491
Increase in
accrued
interest........ (77,968) -- -- (77,968)
Increase in
rents paid in
advance and
deposits........ 436,843 219,115 -- 655,958
Decrease in
deferred rental
income.......... 693,372 -- -- 693,372
------------- ------------ -------------- -------------
Total
adjustments..... 9,858,176 8,263,847 2,556,450 20,678,473
------------- ------------ -------------- -------------
Net cash
provided by
(used in)
operating
activities...... 55,422,371 47,100,995 1,635,626 104,158,992
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-430
<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 -- 2,385,941 -- -- -- --
Additions to
land and
buildings on
operating
leases.......... (200,101,667) (58,748,637)(e) (258,851,304) (381,671) (236,372) -- --
Investment in
direct financing
leases.......... (47,115,435) -- (47,115,435) -- -- -- --
Investment in
joint venture... (974,696) -- (974,696) -- -- -- --
Acquisition of
businesses...... -- -- -- -- -- -- (1,965,276)(f)
Purchase of
other
investments..... (16,083,055) -- (16,083,055) -- -- -- --
Net loss in
market value
from investments
in trading
securities...... -- -- -- -- -- 295,514 --
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... -- -- -- -- -- 212,821 --
Investment in
mortgage notes
receivable...... (2,886,648) -- (2,886,648) -- -- -- --
Collections on
mortgage note
receivable...... 291,990 -- 291,990 -- -- -- --
Investment in
equipment notes
receivable...... (7,837,750) -- (7,837,750) -- -- -- --
Collections on
equipment notes
receivable...... 1,263,633 -- 1,263,633 1,783,240 -- -- --
Decrease in
restricted
cash............ -- -- -- -- -- -- --
Increase in
intangibles and
other assets.... (6,281,069) -- (6,281,069) -- -- -- --
Other........... -- -- -- 200,000 -- -- --
------------ ----------- ------------ ----------- --------- ------------ ------------
Net cash
provided by
(used in)
investing
activities...... (277,338,756) (58,749,637) (336,088,393) 1,601,569 (236,372) 508,335 (1,965,276)
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........ -- -- -- -- -- -- --
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (4,574,925) -- (4,574,925) -- -- -- --
Payment of stock
issuance costs.. (34,579,650) -- (34,579,650) -- -- -- --
Proceeds from
borrowing on
line of
credit/notes
payable......... 7,692,040 33,656,518 (e) 41,348,558 198,296 -- 413,555,624 --
Payment on line
of credit/notes
payable......... (8,039) -- (8,039) -- -- (411,805,787) --
Retirement of
shares of common
stock........... (639,528) -- (639,528) -- -- -- --
Distributions to
holders of
minority
interest........ (34,073) -- (34,073) -- -- -- --
Distributions to
limited
partners........ -- -- -- -- -- -- --
Distributions to
stockholders.... (39,449,149) -- (39,449,149) (9,364,488) -- -- --
Other........... (95,101) -- (95,101) -- 24 (2,500,011) --
------------ ----------- ------------ ----------- --------- ------------ ------------
Net cash
provided by
(used in)
financing
activities...... 313,835,541 33,656,518 347,492,059 (8,200,077) 51,854 (700,074) --
Net increase
(decrease) in
cash............ 75,613,060 (3,173,254) 72,439,806 449,308 (335,688) 1,845,986 (16,513,416)
Cash at
beginning of
year............ 47,586,777 -- 47,586,777 264,000 1,298,261 680,092 --
------------ ----------- ------------ ----------- --------- ------------ ------------
Cash at end of
year............ $123,199,837 $(3,173,254) $120,026,583 $ 713,308 $ 962,573 $ 2,526,078 $(16,513,416)
============ =========== ============ =========== ========= ============ ============
<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 -- 19,607,047
Additions to
land and
buildings on
operating
leases.......... (259,469,347) (2,304,586) -- (261,773,933)
Investment in
direct financing
leases.......... (47,115,435) (959,640) -- (48,075,075)
Investment in
joint venture... (974,696) (8,730,835) -- (9,705,531)
Acquisition of
businesses...... (1,965,276) -- (15,035,724)(g) (17,001,000)
Purchase of
other
investments..... (16,083,055) -- -- (16,083,055)
Net loss in
market value
from investments
in trading
securities...... 295,514 -- -- 295,514
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... 212,821 -- -- 212,821
Investment in
mortgage notes
receivable...... (2,886,648) -- -- (2,886,648)
Collections on
mortgage note
receivable...... 291,990 785,947 -- 1,077,937
Investment in
equipment notes
receivable...... (7,837,750) -- -- (7,837,750)
Collections on
equipment notes
receivable...... 3,046,873 -- -- 3,046,873
Decrease in
restricted
cash............ -- 2,054,030 -- 2,054,030
Increase in
intangibles and
other assets.... (6,281,069) -- -- (6,281,069)
Other........... 200,000 194,644 -- 394,644
------------- ------------- ----------------- -------------
Net cash
provided by
(used in)
investing
activities...... (336,180,137) 8,260,666 (15,035,724) (342,955,195)
Cash Flows from
Financing
Activities:
Subscriptions
received from
stockholders.... 386,592,011 -- -- 386,592,011
Contributions
from limited
partners........ -- -- -- --
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (4,574,925) -- -- (4,574,925)
Payment of stock
issuance costs.. (34,579,650) -- -- (34,579,650)
Proceeds from
borrowing on
line of
credit/notes
payable......... 455,102,478 -- -- 455,102,478
Payment on line
of credit/notes
payable......... (411,813,826) -- -- (411,813,826)
Retirement of
shares of common
stock........... (639,528) -- -- (639,528)
Distributions to
holders of
minority
interest........ (34,073) (170,715) -- (204,788)
Distributions to
limited
partners........ -- (54,151,978) -- (54,151,978)
Distributions to
stockholders.... (48,813,637) -- -- (48,813,637)
Other........... (2,595,088) -- -- (2,595,088)
------------- ------------- ----------------- -------------
Net cash
provided by
(used in)
financing
activities...... 338,643,762 (54,322,693) -- 284,321,069
Net increase
(decrease) in
cash............ 57,885,996 1,038,968 (13,400,098) 45,524,866
Cash at
beginning of
year............ 49,829,130 18,658,902 -- 68,488,032
------------- ------------- ----------------- -------------
Cash at end of
year............ $107,715,126 $ 19,697,870 $ (13,800,098) $114,012,898
============= ============= ================= =============
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-431
<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 March 31, 1999 reflects the transactions
of the acquisition of the Advisor and CNL Restaurant Financial Services Group
as set forth in this Proxy Statement. The Pro Forma Statements of Earnings for
the quarter ended March 31, 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 May 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 March 31, 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. Capitalized terms have the
meanings as defined in the Proxy Statement.
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 consideration 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 the consideration paid exceeds the fair value of the
net tangible assets received. This expense 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.
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 $33,656,518 borrowed under APF's credit facility
and the use of $25,093,119
in cash and cash equivalents at March 31, 1999 to pro forma properties
acquired from April 1, 1999 through May 31, 1999 as if these properties had
been acquired on March 31, 1999. Based on historical results through May 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.
F-432
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Funds using the purchase
accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Funds Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares Offered............ 3,800,000 2,350,000 27,028,337.2 33,178,337.2
Exchange Value............ $ 20 $ 20 $ 20 $ 20
----------- ----------- ------------ ------------
Share Consideration....... $76,000,000 $47,000,000 $540,566,744 $663,566,744
Cash Consideration........ -- -- 6,298,000 6,298,000
APF Transaction Costs..... 1,214,317 750,959 8,737,724 10,703,000
----------- ----------- ------------ ------------
Total Purchase Price...... 77,214,317 47,750,959 555,602,468 680,567,744
Net Assets--Historical.... 7,141,252 10,006,878 444,361,486 461,509,616
Purchase Price Adjust-
ments:
Land and buildings on op-
erating leases.......... 90,953,669 90,953,669
Net investment in direct
financing leases........ 23,206,625 23,206,625
Investment in joint ven-
tures................... 16,083,265 16,083,265
Accrued rental income.... (18,227,192) (18,227,192)
Intangibles and other as-
sets.................... (2,792,876) (775,385) (3,568,261)
Goodwill* ............... 40,536,957 -- 40,536,957
----------- ----------- ------------ ------------
Excess purchase price.... 70,073,065 -- -- 70,073,065
----------- ----------- ------------ ------------
Total allocation...... $77,214,317 $47,750,959 $555,602,468 $680,567,744
=========== =========== ============ ============
</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 $10,703,000 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 $70,073,065 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 40,536,957 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
APIC (CFA, CFS, CFC)................................... 13,857,645
Retained Earnings...................................... 3,277,060
Accumulated distributions in excess of earnings........ 70,073,065
Goodwill for CFC (Intangibles and other assets)........ 40,536,957
CFC/CFS Org Costs/Other Assets....................... 2,792,876
Cash to pay APF transaction costs.................... 1,965,276
APF Common Stock..................................... 61,500
APF APIC............................................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
</TABLE>
F-433
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C>
2.Partners Capital...................................... 444,361,486
Land and buildings on operating leases................ 90,953,669
Net investment in direct financing leases............. 23,206,625
Investment in joint ventures.......................... 16,083,265
Deferred rental income................................ 0
Accrued rental income............................... 18,227,192
Intangibles and other assets........................ 775,385
Cash to pay APF Transaction costs................... 8,737,724
Cash consideration to Income Funds.................. 6,298,000
APF Common Stock.................................... 270,283
APF APIC............................................ 540,296,461
(To record the acquisition of the Income Funds)
</TABLE>
(C) Represents the elimination by APF of $148,629 in related party payables
recorded as receivables by the Advisor.
(D) Represents the elimination of federal income taxes payable of $271,741
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 $1,042,835 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 March 31, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $2,339,153 and depreciation
expense of $349,465 as if properties that had been operational when they
were acquired by APF from January 1, 1999 through May 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........................... $ (292,575)
Secured equipment lease fees............................... (26,127)
Advisory fees.............................................. (63,393)
Reimbursement of administrative costs...................... (182,125)
Acquisition fees........................................... (9,483)
Underwriting fees.......................................... (211)
Administrative, executive and guarantee fees............... (290,036)
Servicing fees............................................. (257,767)
Development fees........................................... (14,678)
Management fees............................................ (697,364)
-----------
Total.................................................... $(1,833,759)
===========
</TABLE>
F-434
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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 quarter ended March 31, 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 quarter ended March
31, 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............................................ $ 62,068
(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........................... $ (377,734)
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
Management fees............................................ $ (697,364)
Administrative executive and guarantee fees................ (290,036)
Servicing fees............................................. (257,767)
Advisory fees.............................................. (63,393)
-----------
$(1,308,560)
===========
(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.
(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................................... $ 506,712
</TABLE>
(i) Represents the elimination of $248,679 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 $276,874 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.
F-435
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(k) Represents the elimination of fees between the Advisor and the
Funds:
<TABLE>
<S> <C>
Management fees.............................................. $ (55,198)
Reimbursement of administrative costs........................ (222,678)
---------
$(277,876)
=========
</TABLE>
(l) Represents the elimination of $222,678 in administrative costs
reimbursed by the Funds to the Advisor.
(m) Represents savings of $186,712 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 $55,198 in management fees by the
Funds to the Advisor.
(o) Represents additional state income taxes of $111,521 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1999 through March 31, 1999 had been acquired
on January 1, 1999 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, 1999 and that these entities had operated
under a REIT structure as of January 1, 1999.
(p) Represents an increase in depreciation expense of $510,725 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 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
$128,387 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, 1999 were assumed to have been
issued and outstanding as of January 1, 1999. 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) Pro forma distributions were assumed to be declared based on pro
forma cash from operations, adjusted to add back the cash invested in notes
receivable from the pro forma statement of cash flows.
(t) Represents pro forma weighted average shares outstanding multiplied
times the Exchange Value of $20.
(u) Represents pro forma distributions declared divided by pro forma
weighted average dollars outstanding multiplied by an average $10,000
investment.
F-436
<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 $21,919,865 and depreciation
expense of $2,889,368 as if properties that had been operational when they
were acquired by APF from January 1, 1998 through May 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>
F-437
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(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>
(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..................................... $2,026,848
</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 lease acquired from the Income Funds as if the leases had been acquired
on January 1, 1998.
F-438
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(k) Represents the elimination of fees between the Advisor and the
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 May 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 $2,042,902 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
$513,548 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
reverse stock split proposal and a proposal to increase the number of
authorized common shares of APF on January 1, 1998.
(t) Pro forma distributions were assumed to be declared based on pro
forma cash from operations, adjusted to add back the cash invested in notes
receivable and subtract the net cash proceeds from the securitization of
notes receivable from the pro forma statement of cash flows.
F-439
<PAGE>
(u) Represents pro forma weighted average shares outstanding multiplied
times the Exchange Value of $20.
(v) Represents pro forma distributions declared divided by pro forma
weighted average dollars outstanding multiplied by an average $10,000
investment.
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 March 31, 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 use of amounts borrowed under APF's credit facility
and the use of cash to pro forma property acquisitions from January 1, 1999
through May 31, 1999 as if they had occurred on January 1, 1999.
(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.
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.
F-440
<PAGE>
(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 use of cash amounts borrowed under APF's credit
facility and the use of pro forma property acquisitions from January 1,
1998 through May 31, 1999 as if they had occurred 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.
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-441
